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Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund

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  • Christian Gollier

Abstract

By using their financial reserves efficiently, pension funds can smooth shocks on asset returns, and can thus facilitate intergenerational risk-sharing. In addition to the primary benefit of improved time diversification, this form of risk allocation affords the additional benefit of allowing these funds to take better advantage of the equity premium, which also favors the consumers. In this paper, our aim is twofold. First, we characterize the socially efficient policy rules of a collective pension plan in terms of portfolio management, capital payments to retirees, and dividend payments to shareholders. We examine both the first-best rules and the second-best rules, where, in the latter case, the fund is constrained by a solvency ratio and by a guaranteed minimum return to workers’ contributions. Second, we measure the social surplus of the system compared to a situation in which each generation would save and invest in isolation for its own retirement. One of the main results of the paper is that better intergenerational risk-sharing does not reduce the risk born by each generation. Rather, it increases the expected return to the workers’ contributions.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1969.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1969

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Related research

Keywords: dynamic portfolio choice; pension; retirement; intergenerational risk sharing; financial intermediation;

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References

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  1. Coen Teulings & Casper Vries, 2006. "Generational Accounting, Solidarity and Pension Losses," De Economist, Springer, vol. 154(1), pages 63-83, 03.
  2. James M. Poterba & Joshua Rauh & Steven F. Venti, 2005. "Utility Evaluation of Risk in Retirement Saving Accounts," NBER Chapters, in: Analyses in the Economics of Aging, pages 13-58 National Bureau of Economic Research, Inc.
  3. Henning Bohn, 2004. "Intergenerational Risk Sharing and Fiscal Policy," 2004 Meeting Papers 22, Society for Economic Dynamics.
  4. Gollier, Christian, 2002. "Time diversification, liquidity constraints, and decreasing aversion to risk on wealth," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1439-1459, October.
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  7. Cui, Jiajia & Jong, Frank De & Ponds, Eduard, 2011. "Intergenerational risk sharing within funded pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(01), pages 1-29, January.
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  9. Piero Gottardi & Felix Kubler, 2009. "Social Security and Risk Sharing," Economics Working Papers ECO2009/12, European University Institute.
  10. Georges de Menil & Eytan Sheshinski, 2004. "Planning for the Optimal Mix of Paygo Tax and Funded Savings," DELTA Working Papers 2004-15, DELTA (Ecole normale supérieure).
  11. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
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  15. Christian Gollier, 2005. "Optimal Portfolio Management for Individual Pension Plans," CESifo Working Paper Series 1394, CESifo Group Munich.
  16. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  17. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
  18. Salvador Valdés-Prieto, 2005. "Securitization of taxes implicit in PAYG pensions," Economic Policy, CEPR & CES & MSH, vol. 20(42), pages 215-265, 04.
  19. Epstein, Larry G., 1983. "Decreasing absolute risk aversion and utility indices derived from cake-eating problems," Journal of Economic Theory, Elsevier, vol. 29(2), pages 245-264, April.
  20. Gary Burtless, 2000. "Social Security Privatization and Financial Market Risk: Lessons from U.S. Financial History," Discussion Papers of DIW Berlin 211, DIW Berlin, German Institute for Economic Research.
  21. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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Blog mentions

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  1. De economie van Poolexpedities
    by Thijs in eco.nomie.nl on 2009-09-16 12:42:23
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Cited by:
  1. Broeders, Dirk & Chen, An & Koos, Birgit, 2011. "A utility-based comparison of pension funds and life insurance companies under regulatory constraints," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 1-10, July.
  2. Noël Bonneuil, 2013. "Early Warning to Insolvency in the Pension Fund: The French Case," Risks, MDPI, Open Access Journal, vol. 1(1), pages 1-13, January.
  3. Jacob A. Bikker & Dirk W.G.A. Broeders & David A. Hollanders & Eduard H.M. Ponds, 2009. "Pension funds' asset allocation and participant age: a test of the life-cycle model," DNB Working Papers 223, Netherlands Central Bank, Research Department.
  4. Mehlkopf, R.J., 2011. "Risk sharing with the unborn," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4960700, Tilburg University.
  5. Hoevenaars, Roy P.M.M. & Ponds, Eduard H.M., 2008. "Valuation of intergenerational transfers in funded collective pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 578-593, April.
  6. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
  7. Arjen Siegmann, 2008. "Minimum Funding Ratios for Defined-Benefit Pension Funds," DNB Working Papers 180, Netherlands Central Bank, Research Department.
  8. Beetsma, Roel M.W.J. & Romp, Ward E. & Vos, Siert J., 2012. "Voluntary participation and intergenerational risk sharing in a funded pension system," European Economic Review, Elsevier, vol. 56(6), pages 1310-1324.
  9. Javed I. Ahmed & Brad M. Barber & Terrance Odean, 2013. "Made poorer by choice: worker outcomes in Social Security v. private retirement accounts," Finance and Economics Discussion Series 2013-23, Board of Governors of the Federal Reserve System (U.S.).
  10. Roel Beetsma & Ward Romp & Siert J. Vos, 2011. "Voluntary Participation and Intergenerational Risk Sharing in a Funded Pension System," Tinbergen Institute Discussion Papers 11-056/2/DSF19, Tinbergen Institute.
  11. Jan Bonenkamp, 2009. "Measuring Lifetime Redistribution in Dutch Occupational Pensions," De Economist, Springer, vol. 157(1), pages 49-77, March.

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