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Lessons from the financial crisis: Funded pension funds should invest conservatively

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  • Du Caicai
  • Muysken Joan
  • Sleijpen Olaf

    (METEOR)

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    Abstract

    We model a three-pillar pension system and analyse in this context the impact of the financial crisis on the aggregate economy, using an overlapping generations model where individuals live for two periods. The system consists of (1) a PAYG pension system, (2) a Defined Benefit pension fund, and (3) private savings. We show that in this pension system the impact of the financial crisis on the economy is mitigated in case the funded pension funds have invested in more risk averse assets and savings are invested in more risky assets. In order to illustrate the working of the model with respect to the impact of the financial crisis, both in terms of size and development over time, we provide simulation results for the Netherlands. We argue that the lesson from the financial crisis is that pension funds should always invest in relatively risk-free assets, while private savings can be invested in more risky assets.

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    Bibliographic Info

    Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 020.

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    Date of creation: 2011
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    Handle: RePEc:unm:umamet:2011020

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    Keywords: macroeconomics ;

    References

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    1. Bas van Groezen & Lex Meijdam & Harrie A. A. Verbon, 2007. "The Case For Pay-As-You-Go Pensions In A Service Economy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(2), pages 151-165, 05.
    2. Matsen, E. & Thogersen, O., 2001. "Designing Social Security - A Portfolio Choice Approach," Papers 21/2001, Norwegian School of Economics and Business Administration-.
    3. Gary Burtless, 2009. "Lessons of the Financial Crisis for the Design of National Pension Systems," CESifo Working Paper Series 2735, CESifo Group Munich.
    4. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph, 2009. "Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 25-34, August.
    5. Dutta, Jayasri & Kapur, Sandeep & Orszag, J. Michael, 2000. "A portfolio approach to the optimal funding of pensions," Economics Letters, Elsevier, vol. 69(2), pages 201-206, November.
    6. David K. Miles, 2000. "Funded and Unfunded Pension Schemes: Risk, Return and Welfare," CESifo Working Paper Series 239, CESifo Group Munich.
    7. Markus Knell, 2008. "The Optimal Mix Between Funded and Unfunded Pensions System When People Care About Relative Consumption," Working Papers 146, Oesterreichische Nationalbank (Austrian Central Bank).
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