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A Dynamic Accumulation Model for the Second Pillar of the Slovak Pension System

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Abstract

Since January 2005, pensions in Slovakia are operated by a three-pillar system as proposed by the World Bank. This paper concentrates on the mandatory, fully funded second pillar. The authors present a dynamic accumulation model for determining the optimal switching strategy among pension funds with different risk profiles. The resulting strategies depend on the individual risk preferences of future pensioners. The authors´ results illustrated that gradual decreasing risk while amassing savings for a pension is rational. Furthermore, the authors present several simulations of optimal fund-switching strategies for various model parameter settings.

Suggested Citation

  • Soòa KILIÁNOVÁ & Igor MELICHERÈÍK & Daniel ŠEVÈOVIÈ, 2006. "A Dynamic Accumulation Model for the Second Pillar of the Slovak Pension System," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(11-12), pages 506-521, November.
  • Handle: RePEc:fau:fauart:v:56:y:2006:i:11-12:p:506-521
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Péter Benczúr, 1999. "Changes in the Implicit Debt Burden of the Hungarian Social Security System," MNB Working Papers 1999/8, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Young, H Peyton, 1990. "Progressive Taxation and Equal Sacrifice," American Economic Review, American Economic Association, vol. 80(1), pages 253-266, March.
    4. András Simonovits, 2000. "Partial privatization of a pension system: lessons from Hungary," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(4), pages 519-529.
    5. Chlon, Agnieszka & Gora, Marek & Rutkowski, Michal, 1999. "Shaping pension reform in Poland : security through diversity," Social Protection and Labor Policy and Technical Notes 20852, The World Bank.
    6. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection and Labor Policy and Technical Notes 20048, The World Bank.
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    More about this item

    Keywords

    Bellman equation; dynamic stochastic programming; funded pillar; pension portfolio simulations; risk aversion; Slovak pension system; utility function;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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