Risk Management of Pension Systems from the Perspective of Loss Aversion
AbstractThis paper studies pension design from a risk management point of view using a lexicographic loss aversion model. Interest in this model stems from the fact that it explains income expansion paths of equity and total savings particularly well. I find that all income groups are likely to benefit from a PAYGO system, even in the absence of any redistribution. Optimal equity investments are close to zero for the two bottom income quintiles and increase sharply for higher incomes. The results are compared to optimal pension plans under HARA preferences. I find that a PAYGO system has higher value under loss aversion than in the HARA case. Moreover, equity shares correspond more closely to empirical observations.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1572.
Date of creation: 2005
Date of revision:
pension system; portfolio choice; income heterogeneity; loss aversion; HARA preferences;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-PBE-2005-12-09 (Public Economics)
- NEP-PUB-2005-12-09 (Public Finance)
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