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CEE Transition from PAYG to Private Pensions: Income Gaps and Asset Allocation

  • Ales S. BERK

    ()

    (University of Ljubljana, Faculty of Economics)

  • Mitja COK

    (University of Ljubljana, Faculty of Economics)

  • Marko KOSAK

    (University of Ljubljana, Faculty of Economics)

  • Joze SAMBT

    (University of Ljubljana, Faculty of Economics)

Registered author(s):

    Rapid population aging driven by low fertility and increasing longevity requires further adjustments of the traditional pension frameworks in Central and Eastern Europe (CEE). In this article we analyze the pension systems of the Czech Republic, Hungary, Poland, Slovakia, and Slovenia and show firstly that fiscal limitations are expected to significantly reduce PAYG pensions in CEE countries given the current and projected demographic dynamics. Secondly, we show that existing private pension plans will not be able to fill the gap to the desirable replacement rate. Without implementation of additional pension saving plans during the active period, there is a threat that many individuals will fall below the poverty line after retirement. Thirdly, we argue that the success of such pension plans will crucially depend on asset allocation decisions. Hence, governments should implement financial literacy programs in order to promote less conservative, more profitable asset allocation decisions by individuals over the longer run.

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    Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

    Volume (Year): 63 (2013)
    Issue (Month): 4 (August)
    Pages: 360-381

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    Handle: RePEc:fau:fauart:v:63:y:2013:i:4:p:360-381
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    1. Maarten van Rooij & Annamaria Lusardi & Rob Alessi, 2007. "Financial literacy and stock market participation," DNB Working Papers 146, Netherlands Central Bank, Research Department.
    2. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," CeRP Working Papers 54, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    3. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
    4. M.C.J. van Rooij & A. Lusardi & R. Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers 23-23, Utrecht School of Economics.
    5. Andreu, Laura & Ferruz, Luis & Vicente, Luis, 2010. "The importance of asset allocation in Spanish equity pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(01), pages 129-142, January.
    6. Ian Hathaway & Sameer Khatiwada, 2008. "Do financial education programs work?," Working Paper 0803, Federal Reserve Bank of Cleveland.
    7. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303, March.
    8. Cai Cai Du & Joan Muysken & Olaf Sleijpen, 2011. "Economy wide risk diversification in a three-pillar pension system," DNB Working Papers 286, Netherlands Central Bank, Research Department.
    9. Davis, E. Philip & Hu, Yu-Wei, 2008. "Does funding of pensions stimulate economic growth?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(02), pages 221-249, July.
    10. European Commission, 2013. "Taxation trends in the European Union: 2013 edition," Taxation trends 2013, Directorate General Taxation and Customs Union, European Commission.
    11. European Commission, 2012. "Taxation trends in the European Union: 2012 edition," Taxation trends 2012, Directorate General Taxation and Customs Union, European Commission.
    12. Börsch-Supan, Axel & Reil-Held, Anette & Schunk, Daniel, 2008. "Saving incentives, old-age provision and displacement effects: evidence from the recent German pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(03), pages 295-319, November.
    13. Richard Disney & John Gathergood, . "Financial Literacy ad Indebtedness: New Evidence for UK Consumers," Discussion Papers 11/05, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
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