Intergenerational Risk Sharing Under Endogenous Labor Supply

This paper evaluates the welfare effects from labor-supply distortions in the context of a pre-funded social security scheme. The central feature of the pension fund model is that equity risk manifests itself in the form of implicit taxes and subsidies on the labor earnings of participants. The labor-supply choices of participants are assumed to be elastic with respect to wage-differentials, implying that risk-taking and risk-sharing induces distortions in labor markets. I show that labor-supply effects impede the pension fund from taking advantage of intergenerational risk-sharing. The analysis provides an economic justification for solvency rules that require financial losses to be recouped in a short time-period