Social security with heterogeneous populations subject to demographic shocks

In a previous paper, we showed how a pay-as-you-go social security scheme, based on voluntary contributions, can be an appropriate institution to reac h an optimal sharing of risks among generations in the presence of demograp hic uncertainties. We study here the functioning of such schemes when there are different population strata, with different demographic shocks and wag es. We show that while a collective voluntary pay-as-you-go scheme can prov ide efficient intergenerational risk sharing, it is likely to be destabiliz ed by pensions funds specialized by agents' types. This is true both when t here is a complete set of contingent markets, where the risk pooling capabi lities of a collective fund are potentially of less interest, and when mark ets are incomplete. In this last circumstance, a collective fund may help t he living agents to share their intragenerational risks. However, we show t hat the resulting allocation does not Pareto dominate the outcome of indivi dual funds by agent types, and that there are incentives for agents to sepa rate from any collective organization.