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A small stochastic model of a pension fund with endogenous saving

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  • Jan Bonenkamp

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  • Martijn van de Ven
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    Abstract

    We live in an uncertain world, yet a lot of research into the sustainability of welfare states is done in the context of certainty. There are good reasons why the analysis is mostly confined to a model of a certain world. A full analysis of the sustainability of welfare states which includes all relevant economic interactions is already intricate in a certain world because it requires the use of complex dynamic general equilibrium models. Even without stochastics, understanding all the mechanisms and its results is sometimes difficult. In addition, when building stochastics into these type of models one may run into the limitations of computer capacity. In this paper we investigate whether uncertainty on the real rate of return on capital and productivity growth (labelled as economic uncertainty) is more or less important than mortality and fertility uncertainty (labelled as demographic uncertainty) for a consumer facing a decision how much to save. Furthermore we look at the errors that are made when uncertainty is neglected in consumer behaviour. The results indicate that economic uncertainty is far more important than demographic uncertainty. The welfare costs of neglecting uncertainty in consumer behaviour seem to be small.

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    Bibliographic Info

    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Memorandum with number 168.

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    Date of creation: Nov 2006
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    Handle: RePEc:cpb:memodm:168

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    1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
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    3. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    4. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, 04.
    5. Ronald D. Lee & Ryan D. Edwards, 2001. "The fiscal impact of population change," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 46.
    6. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
    7. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
    8. Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
    9. Alan J. Auerbach & Kevin A. Hassett, 1999. "Uncertainty and the Design of Long-Run Fiscal Policy," NBER Working Papers 7036, National Bureau of Economic Research, Inc.
    10. Eric M. Engen & Jonathan Gruber, 1995. "Unemployment Insurance and Precautionary Saving," NBER Working Papers 5252, National Bureau of Economic Research, Inc.
    11. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
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    Cited by:
    1. Alessandro Bucciol & Roel M.W.J. Beetsma, 2010. "Inter- and Intra-generational Consequences of Pension Buffer Policy under Demographic, Financial, and Economic Shocks," CESifo Economic Studies, CESifo, vol. 56(3), pages 366-403, September.
    2. Alex Armstrong & Nick Draper & Ed Westerhout, 2008. "The impact of demographic uncertainty on public finances in the Netherlands," CPB Discussion Paper 104, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Cai Cai Du & Joan Muysken & Olaf Sleijpen, 2011. "Economy wide risk diversification in a three-pillar pension system," DNB Working Papers 286, Netherlands Central Bank, Research Department.
    4. Alex Armstrong & Nick Draper & André Nibbelink & Ed Westerhout, 2007. "Fiscal prefunding in response to demographic uncertainty," CPB Discussion Paper 85, CPB Netherlands Bureau for Economic Policy Analysis.

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