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Pension reform, capital markets, and the rate of return

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Author Info
Börsch-Supan, Axel
Heiss, Florian
Winter, Joachim (Institut für Volkswirtschaft und Statistik (IVS))

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Abstract

This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre-funding – for capital markets in Germany. We use a stylized overlapping generations model to predict rates of return over a long horizon taking demographic projections as given. Our simulations show that a transition to a partially funded system crowds out existing savings only partially. The capital stock increases initially, but decreases when the babyboom generations enter retirement. The corresponding decrease in the rate of return, which results from both population aging and pre-funded pensions, is only modest, less than one percentage point in the closed economy, fixed-technology case. The return on capital can be improved by international diversification, that is, by investing pension funds in countries with a more favorable demographic transition path. Feedback effects from strengthened capital markets and improved corporate governance, which are unlikely to be achieved with capital market reforms alone, will raise capital performance further.

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Paper provided by Institut für Volkswirtschaft und Statistik (IVS), University of Mannheim in its series IVS discussion paper series with number 589.

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Handle: RePEc:mea:ivswpa:589

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Find related papers by JEL classification:
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts

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