Lessons from the financial crisis: Funded pension funds should invest conservatively
AbstractWe model a three-pillar pension system and analyse in this context the impact of the financial crisis on the aggregate economy, using an overlapping generations model where individuals live for two periods. The system consists of (1) a PAYG pension system, (2) a Defined Benefit pension fund, and (3) private savings. We show that in this pension system the impact of the financial crisis on the economy is mitigated in case the funded pension funds have invested in more risk averse assets and savings are invested in more risky assets. In order to illustrate the working of the model with respect to the impact of the financial crisis, both in terms of size and development over time, we provide simulation results for the Netherlands. We argue that the lesson from the financial crisis is that pension funds should always invest in relatively risk-free assets, while private savings can be invested in more risky assets.
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Bibliographic InfoPaper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 020.
Date of creation: 2011
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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-16 (All new papers)
- NEP-CMP-2011-04-16 (Computational Economics)
- NEP-MAC-2011-04-16 (Macroeconomics)
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