Studying Generational Risk in a Large‐Scale Life‐Cycle Model

We construct an 80‐period OLG model with aggregate shocks to study the size of generational risk and its mitigation via Social Security under different calibrations commonly considered in the literature. Our main findings are that generational risk is small or modest if one calibrates shocks to the volatility of macro aggregates and that Social Security exacerbates that risk. Calibrations that overstate the variability of macro aggregates generate substantially more generational risk, which Social Security can meaningfully mitigate. Finally, we find no support for the view that intergenerational policy can deliver Pareto improvements when safe interest rates run below the average growth rate. In our model, such policies entail welfare losses from crowding out that swamp oblique risk‐mitigation schemes.