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The Optimal Portfolio of PAYG Benefits and Funded Pensions in Germany

Author

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  • Christoph Anders
  • Max Groneck

Abstract

The combination of a pay-as-you-go (PAYG) and a self-funded pension system is studied from a portfolio perspective considering the trade-off between speculation and hedging. We analyze the German PAYG social security system and subsidized private savings (Riester pension). The return and the risk associated with a combination of both systems are simulated in a stochastic economy. Our results suggest that (1) a risk-minimizing structure of total retirement income still allows a fraction 5 percent to be financed via private savings, due to the benefits of hedging, (2) the optimal portfolio shares at a fixed total pension level imply high fractions of private savings even if agents are highly risk-averse, and (3) determining the optimal size of the total pension level under the current social security system implies only low additional private saving rates.

Suggested Citation

  • Christoph Anders & Max Groneck, 2017. "The Optimal Portfolio of PAYG Benefits and Funded Pensions in Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 73(3), pages 255-291, September.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201709)73:3_255:topopb_2.0.tx_2-m
    DOI: 10.1628/001522117X14915570953903
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    More about this item

    Keywords

    Social security; PAYG system; funded pensions; optimal portfolio;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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