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

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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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Bibliographic Info

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

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

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

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References

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  1. Matsen, E. & Thogersen, O., 2001. "Designing Social Security - A Portfolio Choice Approach," Papers 21/2001, Norwegian School of Economics and Business Administration-.
  2. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
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Citations

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Cited by:
  1. Du Caicai & Muysken Joan & Sleijpen Olaf, 2011. "Lessons from the financial crisis: Funded pension funds should invest conservatively," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Bilancini, Ennio & D’Antoni, Massimo, 2012. "The desirability of pay-as-you-go pensions when relative consumption matters and returns are stochastic," Economics Letters, Elsevier, vol. 117(2), pages 418-422.
  3. Eduardo Fajnzylber & David Robalino, 2010. "Assessing Fiscal Costs and the Distribution of Pensions in Transitions to FDC and NDC Systems: A Retrospective Analysis for Chile," Working Papers wp_005, Adolfo Ibáñez University, School of Government.
  4. Knell, Markus, 2013. "The Intergenerational Distribution of Demographic Fluctuations in Unfunded and Funded Pension Systems," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79830, Verein für Socialpolitik / German Economic Association.
  5. Meijdam, A.C. & Ponds, E.H.M., 2013. "On the Optimal Degree Of Funding Of Public Sector Pension Plans," Discussion Paper 2013-011, Tilburg University, Center for Economic Research.

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