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Lessons of the Financial Crisis for the Design of National Pension Systems

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  • Gary Burtless

Abstract

The recent financial crisis and historical record suggest important lessons about the design of national pension systems. First, wide fluctuation in asset returns makes it hard for well-informed savers to select a saving rate or a sensible investment strategy for DC pensions. Workers who follow identical investment strategies but who retire a few years apart can receive DC pensions that are startlingly unequal. Second, it is hard for ordinary workers, as opposed to optimal planners, to make sensible choices about portfolio allocation. Their investment errors mean that actual returns fall short of the theoretical returns that could be earned by a well-informed, disciplined investor.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2735.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2735

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  1. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1747-1764, October.
  2. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt81q3136r, Berkeley Olin Program in Law & Economics.
  3. James J. Choi & David Laibson & Brigitte C. Madrian, 2004. "Plan Design and 401(k) Savings Outcomes," NBER Working Papers 10486, National Bureau of Economic Research, Inc.
  4. Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997. "An Asset Allocation Puzzle," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 181-91, March.
  5. 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.
  6. Alexander, Gordon J. & Jones, Jonathan D. & Nigro, Peter J., 1998. "Mutual fund shareholders: characteristics, investor knowledge, and sources of information," Financial Services Review, Elsevier, Elsevier, vol. 7(4), pages 301-316.
  7. Bebchuk, Lucian Arye & Fried, Jesse, 2003. "Executive Compensation as an Agency Problem," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3961, C.E.P.R. Discussion Papers.
  8. Shlomo Benartzi & Richard H. Thaler, 2002. "How Much Is Investor Autonomy Worth?," Journal of Finance, American Finance Association, American Finance Association, vol. 57(4), pages 1593-1616, 08.
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Cited by:
  1. Michael Funke & Yu-Fu Chen, 2010. "Booms, recessions and financial turmoil: A fresh look at investment decisions under cyclical uncertainty," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21007, Hamburg University, Department of Economics.
  2. Du Caicai & Muysken Joan & Sleijpen Olaf, 2011. "Lessons from the financial crisis: Funded pension funds should invest conservatively," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Robert L. Brown, 2010. "Retirement 20/20: Innovation in Pension Design," Social and Economic Dimensions of an Aging Population Research Papers, McMaster University 267, McMaster University.
  4. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).
  5. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
    [Short thematic guide to the study of current financial and economic crisis]
    ," MPRA Paper 20743, University Library of Munich, Germany.
  6. Kumara, Ajantha Sisira & Pfau, Wade Donald, 2011. "Lifecycle and fixed portfolio allocation strategies: a performance comparison for emerging market countries," MPRA Paper 31389, University Library of Munich, Germany, revised 10 Jun 2011.

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