Using a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process we integrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension manager's objective of controlling contribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current and prospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatility while restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assess the chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded public pension system can be beneficial for both civil servants and taxpayers.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14332.
Length: Date of creation: Sep 2008 Date of revision: Handle: RePEc:nbr:nberwo:14332
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Find related papers by JEL classification: G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions G15 - Financial Economics - - General Financial Markets - - - International Financial Markets G2 - Financial Economics - - Financial Institutions and Services G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
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