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Funded and Unfunded Pension Schemes: Risk, Return and Welfare

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Author Info
Miles, David

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Abstract

This paper uses stochastic simulations on calibrated models to assess the optimal degree of reliance on fun ded pensions and on a particular type of unfunded (PAYG) pension. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types o f pension system. This paper calculates the expected welfare of agents in different economies where in the steady state the importance of PAYG pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and inc ome risks and also upon the actuarial fairness of annuity contracts.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 239.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_239

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Related research
Keywords: Pensions; annuities; risk-sharing;

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped

References listed on IDEAS
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.:

  1. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 225-51, February. [Downloadable!] (restricted)
    Other versions:
  2. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
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  4. Robert C. Merton, 1981. "On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital Is Not Tradeable," NBER Working Papers 0743, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
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  6. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, . "The Role of Real Annuities and Indexed Bonds In An Individual Accounts Retirement Program," Pension Research Council Working Papers 99-2, Wharton School Pension Research Council, University of Pennsylvania. [Downloadable!]
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  7. Masson, Paul R & Bayoumi, Tamim & Samiei, Hossein, 1998. "International Evidence on the Determinants of Private Saving," World Bank Economic Review, Oxford University Press, vol. 12(3), pages 483-501, September.
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  8. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier. [Downloadable!] (restricted)
  9. N. Gregory Mankiw, 1985. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc. [Downloadable!] (restricted)
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  11. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. David Miles & Allan Timmermann, 1999. "Risk sharing and transition costs in the reform of pension systems in Europe," Economic Policy, CEPR, CES, MSH, vol. 14(29), pages 251-286, October. [Downloadable!] (restricted)
  13. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September. [Downloadable!] (restricted)
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  14. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October. [Downloadable!] (restricted)
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  15. Henning Bohn, 1999. "Social Security and Demographic Uncertainty: The Risk Sharing Properties of Alternative Policies," NBER Working Papers 7030, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Meghir, Costas & Whitehouse, Edward, 1996. "The Evolution of Wages in the United Kingdom: Evidence from Micro Data," Journal of Labor Economics, University of Chicago Press, vol. 14(1), pages 1-25, January. [Downloadable!] (restricted)
  17. Martin Feldstein & Andrew Samwick, 1996. "The Transition Path in Privatizing Social Security," NBER Working Papers 5761, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Bayoumi, Tamim & Masson, Paul R & Samiei, Hossein, 1996. "International Evidence on the Determinants of Saving," CEPR Discussion Papers 1368, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  19. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May. [Downloadable!] (restricted)
    Other versions:
  20. Robert C. Merton, 1983. "On the Role of Social Security as a Means for Efficient Risk Sharing in an Economy Where Human Capital Is Not Tradable," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 325-358 National Bureau of Economic Research, Inc. [Downloadable!]
  21. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, . "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers 97-9, Wharton School Pension Research Council, University of Pennsylvania.
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  22. Sinn, Hans-Werner, 1999. "Pension Reform and Demographic Crisis: Why a Funded System is Needed and why it is not Needed," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  23. Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January. [Downloadable!] (restricted)
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  24. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  25. Martin Feldstein & Elena Ranguelova & Andrew Samwick, 1999. "The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain," NBER Working Papers 7016, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  26. Deborah Roseveare & Willi Leibfritz & Douglas Fore & Eckhard Wurzel, 1996. "Ageing Populations, Pension Systems and Government Budgets: Simulations for 20 OECD Countries," OECD Economics Department Working Papers 168, OECD, Economics Department. [Downloadable!]
  27. Olivia S. Mitchell & Stephen P. Zeldes, 1996. "Social Security Privatization: A Structure for Analysis," NBER Working Papers 5512, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  28. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 465-89, July. [Downloadable!] (restricted)
  29. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994. [Downloadable!]
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  30. Miles, David, 1997. "A Household Level Study of the Determinants of Incomes and Consumption," Economic Journal, Royal Economic Society, vol. 107(440), pages 1-25, January. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2001. "Aging, pension reform, and capital flows: A multi-country simulation model," Sonderforschungsbereich 504 Publications 01-08, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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