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This paper studies the welfare implications of a PAYG pension system in a neoclassical growth model with overlapping generations, demographic uncertainty and sequentially incomplete markets. In absence of public pensions, small cohorts tend to be favored by the changes in relative prices implied by fertility shocks. As described in Bohn, PAYG Define Benefit systems can help to share the financial risks created by this type of demographic uncertainty across the generations. The overall welfare impact depends on the balance between this insurance effect and the well known crowding-out effect stemming from the unfunded character of the system.
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