Content and objectives
Pension systems are designed to meet three main objectives: to allow people to smooth consumption in their life cycle; to prevent poverty in old age; to establish a compact among generations. These goals, in their turn, are meant to insure individual risk, to overcome individual planning limitations and to provide some sharing for aggregate risks. Within the first category of risks, longevity and earnings risks are predominant; within the second, myopia and time inconsistency have to be addressed; within the third, demographic, economic and political risks should be as much diversified as possible.

Starting from this framework, the course aims at placing European pension systems and reforms in the context of the economic theory of households’ savings, where imperfect and incomplete (financial and insurance) markets make room for the state to play an insurer’s role, besides its traditional redistributive tasks.

The logic behind the “insurance perspective” does not imply giving up the traditional objective of solidarity, both within and between generations; indeed, this aim is strengthened by highlighting the key role of risk diversification. Furthermore, thanks to an analytical framework based on insurance, measures aimed at achieving a given distributional goal are easily designed; while, if the insurance framework is ignored, redistribution in practice ends up with unforeseen and undesirable features. Covered topics are:

i. Microeconomic foundations of retirement savings
•          Basic deterministic models  (intertemporal optimization models: assumptions and main results)
•           Life uncertainty and its effects 
•          The introduction of (actuarially fair) life insurance and the dominance of annuities
•          Why is the market for annuities everywhere so thin?

ii. An economic analysis of social security (micro and macroeconomic features of social security)
•          Financing mode: PAYG vs. Funding
•          Pension formulae (DB vs. DC)
•          Actuarial fairness and neutrality
•          Measures of financial sustainability
•          Measures of adequacy
•          Redistribution (both within and between generations)
•          Incentive structure
•          (Induced) retirement 
•          The aggregate pension wealth (debt)

iii. Theoretical and empirical models of retirement
•          Stylised facts about retirement
•          Determinants of retirement choice
•          The implicit tax on postponing retirement (and related
measures) 

iv. Positive models of social security and the economics of pension reforms
•          A political economic approach to social security
•          Assessing the political sustainability of social security reforms

Literature

• Browning, M., A. Lusardi, 1996, “Household Saving: Micro Theories and Micro Facts”, Journal of Economic Literature, 34, 1797-1855.
• Coronado J. L., D. Fullerton, T. Glass, 1999, “Distributional Impacts of Proposed Changes to the Social Security System in Tax Policy and the Economy, Vol. 13, Poterba, Jim, ed., 1999, pp. 149-186.
• Diamond P. and P. Orszag, 2004, Saving Social Security. A Balanced Approach, Brookings Institution Press, Washington DC.
• Diamond Peter, 2005, “Social Security Rules that Vary with Age”, in: Fornero, E. and P. Sestito (eds), 2005, Pension Systems: Beyond Mandatory Retirement, Cheltenham: Edward Elgar
• Diamond, P. 2004, ‘Social Security’, The American Economic Review, 94(1), March 2004
• Disney, R., “Actuarial-based public pension systems”, in: G. Clark, A. Munnell and M. Orszag, The Oxford Handbook of Pensions and Retirement Income, OUP, 2006.
• Fenge R. and Pestieau P., 2005, “Social Security and Early Retirement”, Cesifo Book Series, the MIT Press.
• Fuchs-Schundeln, N., 2065, Testing Different Saving Theories. Exploiting the Adjustment to a Large Shock, Harvard University, January
• Geanakoplos J., O.S. Mitchell, S. P. Zeldes, 1998, “Social Security Money’s Worth”, PaineWebber WP Series in Money, Economics and Finance 98-05, Columbia Business School, August.
• Gomes F. and Michaelides, A. 2003, “Aggregate implications of defined benefit and defined contribution systems”, Centre Retirement Research at Boston College Working Paper 2003-16.
• Gruber J., D. Wise (eds.), 1999, Social Security and Retirement Around the World, Chicago: University of Chicago Press.
• Lindbeck A. and M. Persson, 2003, “The Gains from Pension Reform”, Journal of Economic Literature, vol. 41 (1), pp. 74-112.
• Mitchell O. S., S. P. Zeldes, 1996, “Social Security Privatization: a Structure for Analysis”, American Economic Review, 86(2), pp: 363-67.
•  Scholtz K. Seshadri A., Khitatrakun S., 2006, “Are Americans Saving “Optimally” for Retirement?” Journal of Political Economy, 114(4), pp. 607-643.