On the Optimal Degree Of Funding Of Public Sector Pension Plans
AbstractAbstract: This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-011.
Date of creation: 2013
Date of revision:
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Web page: http://center.uvt.nl
public sector pension plans; funding; implicit debt; portfolio approach;
Find related papers by JEL classification:
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-03-02 (Economics of Ageing)
- NEP-ALL-2013-03-02 (All new papers)
- NEP-DGE-2013-03-02 (Dynamic General Equilibrium)
- NEP-PUB-2013-03-02 (Public Finance)
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