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CEE Transition from PAYG to Private Pensions: Income Gaps and Asset Allocation

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Author Info

  • Ales S. BERK

    ()
    (University of Ljubljana, Faculty of Economics)

  • Mitja COK

    (University of Ljubljana, Faculty of Economics)

  • Marko KOSAK

    (University of Ljubljana, Faculty of Economics)

  • Joze SAMBT

    (University of Ljubljana, Faculty of Economics)

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    Abstract

    Rapid population aging driven by low fertility and increasing longevity requires further adjustments of the traditional pension frameworks in Central and Eastern Europe (CEE). In this article we analyze the pension systems of the Czech Republic, Hungary, Poland, Slovakia, and Slovenia and show firstly that fiscal limitations are expected to significantly reduce PAYG pensions in CEE countries given the current and projected demographic dynamics. Secondly, we show that existing private pension plans will not be able to fill the gap to the desirable replacement rate. Without implementation of additional pension saving plans during the active period, there is a threat that many individuals will fall below the poverty line after retirement. Thirdly, we argue that the success of such pension plans will crucially depend on asset allocation decisions. Hence, governments should implement financial literacy programs in order to promote less conservative, more profitable asset allocation decisions by individuals over the longer run.

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    Bibliographic Info

    Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

    Volume (Year): 63 (2013)
    Issue (Month): 4 (August)
    Pages: 360-381

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    Handle: RePEc:fau:fauart:v:63:y:2013:i:4:p:360-381

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    Related research

    Keywords: PAYG; private pensions; financial literacy; old-age income; Central and Eastern Europe; transition economics;

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    References

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    1. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303, October.
    2. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    3. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," NBER Working Papers 13565, National Bureau of Economic Research, Inc.
    4. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Working Paper Series 580, Research Institute of Industrial Economics.
    5. Andreu, Laura & Ferruz, Luis & Vicente, Luis, 2010. "The importance of asset allocation in Spanish equity pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(01), pages 129-142, January.
    6. European Commission, 2012. "Taxation trends in the European Union: 2012 edition," Taxation trends 2012, Directorate General Taxation and Customs Union, European Commission.
    7. Börsch-Supan, Axel & Reil-Held, Anette & Schunk, Daniel, 2008. "Saving incentives, old-age provision and displacement effects: evidence from the recent German pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(03), pages 295-319, November.
    8. Cai Cai Du & Joan Muysken & Olaf Sleijpen, 2011. "Economy wide risk diversification in a three-pillar pension system," DNB Working Papers 286, Netherlands Central Bank, Research Department.
    9. Ian Hathaway & Sameer Khatiwada, 2008. "Do financial education programs work?," Working Paper 0803, Federal Reserve Bank of Cleveland.
    10. Davis, E. Philip & Hu, Yu-Wei, 2008. "Does funding of pensions stimulate economic growth?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(02), pages 221-249, July.
    11. Richard Disney & John Gathergood, . "Financial Literacy ad Indebtedness: New Evidence for UK Consumers," Discussion Papers 11/05, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
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