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Generational Accounting, Solidarity and Pension Losses

  • Coen Teulings

    ()

  • Casper Vries

    ()

The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly.

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File URL: http://hdl.handle.net/10.1007/s10645-006-6486-y
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Article provided by Springer in its journal De Economist.

Volume (Year): 154 (2006)
Issue (Month): 1 (03)
Pages: 63-83

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Handle: RePEc:kap:decono:v:154:y:2006:i:1:p:63-83
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  1. Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
  2. Hendricks, Ken & Judd, Ken & Kovenock, Dan, 1980. "A note on the core of the overlapping generations model," Economics Letters, Elsevier, vol. 6(2), pages 95-97.
  3. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
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