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Observations on the Indexation of Old Age Pensions

In: Financial Aspects of the United States Pension System

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  • Lawrence H. Summers

Abstract

This paper examines some positive and normative aspects of the inflation indexation of public and private pensions. The analysis showsthat alternative indexing arrangements may have far less impact on actual patterns of risk bearing than is usually thought to be the case. In so far as inflation indexing has real effects, there is no presumption that they are beneficial. In particular, the pre-commitment aspects of publicindexing may not be efficient. There are sound reasons to believe that voluntarily agreed on, non-indexed private pensions may well be efficient.Non-indexed pensions may result in an efficient allocation of risks given the other assets and liabilities of pension issuers and beneficiaries. In this case, indexation would impede the efficient allocation of risks. In this paper is also developed an ICOLI (interteinporal cost of living index) which is superior to conventional price indices as a way of evaluating the changes in real well being,associated with changes in wealth. The use of this measure has significant implications for the indexation of pensions, and for the question of what assets should be held in pension portfolios.

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This chapter was published in:

  • Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6034.

    Handle: RePEc:nbr:nberch:6034

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Zvi Bodie, 1982. "Investment Strategy in an Inflationary Environment," NBER Chapters, in: The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, pages 47-64 National Bureau of Economic Research, Inc.
    2. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    3. Pesando, James E, 1975. "A Note on the Rationality of the Livingston Price Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 849-58, August.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Michael D. Hurd & John B. Shoven, 1983. "The Economic Status of the Elderly," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 359-398 National Bureau of Economic Research, Inc.
    6. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
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    Cited by:
    1. Sickles, Robin C & Taubman, Paul, 1986. "An Analysis of the Health and Retirement Status of the Elderly," Econometrica, Econometric Society, vol. 54(6), pages 1339-56, November.
    2. Robert C. Merton & Zvi Bodie & Alan Marcus, 1987. "Pension Plan Integration As Insurance Against Social Security Risk," NBER Chapters, in: Issues in Pension Economics, pages 147-172 National Bureau of Economic Research, Inc.
    3. Alan L. Gustman & Olivia S. Mitchell & Thomas L. Steinmeier, 1993. "The Role of Pensions in the Labor Market," NBER Working Papers 4295, National Bureau of Economic Research, Inc.
    4. Bradford, D.F., 1989. "Market Value Us. Financial Accounting Measures Of National Saving," Papers 34, Princeton, Woodrow Wilson School - Discussion Paper.
    5. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.

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