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Severance Pay or Pension Funds?

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  • Devis Geron

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    (University of Padova)

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    Abstract

    The paper aims to analyze the determinants of the individual choice of con- tributing to pension funds, particularly by focusing on individual preferences towards the annuitization of the accumulated pension capital. The analysis is performed in the light of the latest reform of social security in Italy, convert- ing the severance pay scheme (the so-called TFR) into a fully funded scheme of pension funds. The model describes the behavior of a representative agent belonging to a representative generation in steady state, in a partial equilibrium setting with mortality risk as well as uncertainty on wages and financial market returns. Investing in riskier but potentially more rewarding pension funds, paying out annuities from retirement onwards, turns out to be slightly welfare improving with respect to contributing to a severance pay scheme eventually paying out a lump-sum amount. Nonetheless, the welfare-based value of insurance provided by private annuities from pension funds is relatively low, mainly due to a) the pre-existence of (sizeable) public annuities, and b) constraints imposed by annuitization on both saving and consumption behavior after retirement. These findings provide further insights into the Òannuity puzzleÓ issue.

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    File URL: http://economia.unipd.it/sites/decon.unipd.it/files/20110139.pdf
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    Bibliographic Info

    Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0139.

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    Length: 39 pages
    Date of creation: Oct 2011
    Date of revision:
    Handle: RePEc:pad:wpaper:0139

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    Related research

    Keywords: Social Security Reforms; Uncertainty; Fully Funded Pension Schemes.;

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    1. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
    2. Raquel Fonseca & Thepthida Sopraseuth, 2006. "Welfare Effects of Social Security Reforms Across Europe: The Case of France and Italy," Working Papers 437, RAND Corporation Publications Department.
    3. Jeffrey R. Brown & Mark J. Warshawsky, 2001. "Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues," NBER Working Papers 8064, National Bureau of Economic Research, Inc.
    4. Raffaele Miniaci & Chiara Monfardini & Guglielmo Weber, 2010. "How does consumption change upon retirement?," Empirical Economics, Springer, vol. 38(2), pages 257-280, April.
    5. Butler, Monika & Teppa, Federica, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," Journal of Public Economics, Elsevier, vol. 91(10), pages 1944-1966, November.
    6. Erich Battistin & Agar Brugiavini & Enrico Rettore & Guglielmo Weber, 2009. "The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach," American Economic Review, American Economic Association, vol. 99(5), pages 2209-26, December.
    7. Riccardo Cesari & Giuseppe Grandi & Fabio Panetta, 2008. "Supplementary Pension Schemes in Italy: Features,Development and Opportunities for Workers," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 67(1), pages 21-73, March.
    8. Luigi Ventura, 2003. "Direct Measures of Time Preference," The Economic and Social Review, Economic and Social Studies, vol. 34(3), pages 293–310.
    9. Giovanni Guazzarotti & Pietro Tommasino, 2008. "The Annuity Market in an Evolving Pension System: Lessons from Italy," CeRP Working Papers 77, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    10. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
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