A PORTFOLIO APPROACH TO THE OPTIMAL FUNDING OF PENSIONS

Cesifo Working Paper Series, 2000

This paper uses stochastic simulations on calibrated models to assess the optimal degree of reliance on funded pensions and on a particular type of unfunded (PAYG) pension. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system. This paper calculates the expected welfare of agents in different economies where in the steady state the importance of PAYG pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts.

2003

Abstract: Conventional wisdom suggests that the ideal pension system should include a small PAYGO but a large fully funded component. This is partly justified on the grounds of higher return to the individual pensioner and greater capital accumulation for the economy ...

2000

2000

This paper uses stochastic simulations on calibrated models to assess the optimal degree of reliance on fun ded pensions and on a particular type of unfunded (PAYG) pension. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system. This paper calculates the expected welfare of agents in different economies where in the steady state the importance of PAYG pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts.

Journal of Economics and Business, 1988

The world is witnessing an important increase in number of elderly people. This process is accompanied by the increase of the proposition of working and retired population, which has significant economic, social and political implications. To answer these challenges, the governments across the world engaged in comprehensive reforms of social policies, out of which the reform of pension system is the most important. The presented research aims to determine the main directions of pension reforms undertook by different countries. More precisely, the objective is to identify the trends characterizing reforms in developing countries and compare them to the tendencies observed in the reforms of developing economies. Therefore, the aim of research is to get generalized results, which will contribute greatly to the existing scientific literature and will be useful in the process of perfecting and improving the current pension reform. To do so, the paper studies reforms together with the existing scientific literature and public reports issued by international organizations. The results of the study suggest that the most common pension system across the globe implies introduction of the accumulated pension model (Defined Contribution Plan) instead of solidarity pension scheme (Defined Benefit Plan). This is a radical change impacting country's economy, social and cultural norms and legislation. The reason behind the reform was the limitation of the existing model, but also the demographic trend of aging the population.

Insurance: Mathematics and Economics, 2001

We consider a dynamic model of pension funding in a defined benefit plan of an employment system. The prior objective of the sponsor of the pension plan is the determination of the contribution rate amortizing the unfunded actuarial liability, in order to minimize the contribution rate risk and the solvency risk. To this end, the promoter invest in a portfolio with n risky assets and a risk-free security. The aim of this paper is to determine the optimal funding behavior in this dynamic, stochastic framework.

2006

Pension funds based on individual accounts are affected by high operating costs, as shown by the experience of several countries. Contract theory helps to unravel the nature of such problems: managers of pension funds have strong incentives to manipulate market expectations about their capacity through wasteful activities (e.g. promotion). Thus, competition among pension funds entails efficiency losses and gains. Losses are driven by the integration of financing (contribution attraction) and investment (asset allocation and management). Under contract incompleteness, a quasi-competitive funded scheme-centralizing contribution collection and efficiently auctioning the right to manage raised money to competitive fund managers-is Pareto-superior to a market of competitive pension funds.

SSRN Electronic Journal, 2013

This paper reviews the literature on the optimal design and regulation of funded pension schemes. We first characterize optimal saving and investment over an individual's life cycle. Within a stylized modeling framework, we explore optimal individual saving and investing behavior. Subsequently, various extensions of the model are considered, such as additional financial risk factors, stochastic human capital and more elaborate individual preferences. We then turn to the literature on intergenerational risk sharing, which suggests that a long-lived entity such as a pension fund or the government can yield ex-ante welfare gains by allowing non-overlapping generations to trade risk. The scope for this type of intergenerational risk sharing, however, is limited by the ability to commit generations to the contract. These commitment problems raise concerns with respect to sustainability and intergenerational fairness. We explore the role of solvency regulations to address these concerns about intergenerational fairness and discontinuity risk.