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Optimal life cycle investment with pay-as-you-go pension schemes: a portfolio approach

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  • Willem Heeringa
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    Abstract

    In this paper we show how pay-as-you-go pension schemes impact on the individual.s optimal investment portfolio. Introducing a pay-as-you-go pension scheme implies that human wealth of young generations is transferred to retired generations. As a consequence, individuals will in general invest less conservatively. These portfolio effects gradually disappear at the end of life.

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    File URL: http://www.dnb.nl/binaries/Working%20Paper%20168-2008_tcm46-170650.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 168.

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    Date of creation: Feb 2008
    Date of revision:
    Handle: RePEc:dnb:dnbwpp:168

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    Related research

    Keywords: Social security; Risk sharing; Portfolio choice;

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    References

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    1. De Jong, Frank, 2008. "Valuation of pension liabilities in incomplete markets," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(03), pages 277-294, November.
    2. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    3. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
    4. Marshall, David A, 1992. " Inflation and Asset Returns in a Monetary Economy," Journal of Finance, American Finance Association, vol. 47(4), pages 1315-42, September.
    5. Persson, Mats, 2000. "Five Fallacies in the Social Security Debate," Seminar Papers 686, Stockholm University, Institute for International Economic Studies.
    6. Matsen, E. & Thogersen, O., 2001. "Designing Social Security - A Portfolio Choice Approach," Papers 21/2001, Norwegian School of Economics and Business Administration-.
    7. Sanchez-Marcos, Virginia & Sanchez-Martin, Alfonso R., 2006. "Can social security be welfare improving when there is demographic uncertainty?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1615-1646.
    8. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
    9. Michael J. Brennan & Yihong Xia, 2002. "Dynamic Asset Allocation under Inflation," Journal of Finance, American Finance Association, vol. 57(3), pages 1201-1238, 06.
    10. S. Fischer, 1974. "The Demand for Index Bonds," Working papers 132, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
    12. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, October.
    13. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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    Cited by:
    1. Jacob A. Bikker & Dirk W. G. A. Broeders & David A. Hollanders & Eduard H. M. Ponds, 2012. "Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 595-618, 09.

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