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The Optimal Mix Between Funded and Unfunded Pensions Systems When People Care About Relative Consumption

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Author Info
Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,)

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Abstract

In this paper I derive the optimal portfolio mix between a funded and an unfunded pension system when people care about their consumption relative to a reference group. Pay-as-you-go systems with fixed contribution rates have the property that pension benefits are tied to labor income. This lowers the uncertainty of individuals’future relative position and thus increases the attractiveness of unfunded systems. The paper shows analytically that in an OLG model the optimal share of funding decreases with the strength of individuals’ concern for relative standing. A calibrated version of the model that uses data for various countries and time periods suggests that the sensitivity of the optimal share of funding to the concern of relative standing is also quantitatively important. For reasonable assumptions about reference standards it is typically around 20%.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 146.

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Length: 43 pages
Date of creation: 01 Sep 2008
Date of revision:
Handle: RePEc:onb:oenbwp:146

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Postal: P.O. Box 61, A-1011 Vienna, Austria
Phone: +43/1/404 20 7205
Fax: +43/1/404 20 7299
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Web page: http://www.oenb.at/
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Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
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For technical questions regarding this item, or to correct its listing, contact: (Markus Knell and Helmut Stix).

Related research
Keywords: Pension Systems; Social Security; Risk sharing; Portfolio Choice; Relative Consumption.;

Other versions of this item:

Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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  9. Meyer, Donald J. & Meyer, Jack, 2005. "Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1497-1515, November. [Downloadable!] (restricted)
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  17. De Menil, Georges & Murtin, Fabrice & Sheshinski, Eytan, 2006. "Planning for the optimal mix of paygo tax and funded savings," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(01), pages 1-25, March. [Downloadable!]
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  18. Henning Bohn, 1999. "Social Security and Demographic Uncertainty: The Risk Sharing Properties of Alternative Policies," NBER Working Papers 7030, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Dirk Krueger & Felix Kubler, 2006. "Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?," American Economic Review, American Economic Association, vol. 96(3), pages 737-755, June. [Downloadable!]
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  20. Markus Knell, 1999. "Social Comparisons, Inequality, and Growth," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(4), pages 664-, December.
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  21. Olof Johansson-Stenman & Fredrik Carlsson & Dinky Daruvala, 2002. "Measuring Future Grandparents" Preferences for Equality and Relative Standing," Economic Journal, Royal Economic Society, vol. 112(479), pages 362-383, April. [Downloadable!] (restricted)
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