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Lessons of the Financial Crisis for the Design of National Pension Systems


  • Gary Burtless


The recent financial crisis and the historical record suggest important lessons about the design of national pension systems. First, wide fluctuations in asset returns make it hard for well-informed savers to select a saving rate or a sensible investment strategy for defined-contribution (DC) pensions. Workers who follow identical investment strategies but who retire a few years apart can receive DC pensions that are startlingly unequal. Second, it is hard for ordinary workers, as opposed to optimal planners, to make sensible choices about portfolio allocation. Their investment errors mean that actual returns fall short of the theoretical returns that could be earned by well-informed, disciplined investors. (JEL codes: G01, G11, H55 and J26) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email:, Oxford University Press.

Suggested Citation

  • Gary Burtless, 2010. "Lessons of the Financial Crisis for the Design of National Pension Systems," CESifo Economic Studies, CESifo, vol. 56(3), pages 323-349, September.
  • Handle: RePEc:oup:cesifo:v:56:y:2010:i:3:p:323-349

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    References listed on IDEAS

    1. Choi, James J. & Laibson, David & Madrian, Brigitte C., 2004. "Plan Design and 401(K) Savings Outcomes," National Tax Journal, National Tax Association, vol. 57(2), pages 275-298, June.
    2. Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997. "An Asset Allocation Puzzle," American Economic Review, American Economic Association, vol. 87(1), pages 181-191, March.
    3. Gary Burtless, 2000. "Social Security Privatization and Financial Market Risk: Lessons from U.S. Financial History," Discussion Papers of DIW Berlin 211, DIW Berlin, German Institute for Economic Research.
    4. Alexander, Gordon J. & Jones, Jonathan D. & Nigro, Peter J., 1998. "Mutual fund shareholders: characteristics, investor knowledge, and sources of information," Financial Services Review, Elsevier, vol. 7(4), pages 301-316.
    5. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    6. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
    7. Shlomo Benartzi & Richard H. Thaler, 2002. "How Much Is Investor Autonomy Worth?," Journal of Finance, American Finance Association, vol. 57(4), pages 1593-1616, August.
    8. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
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    Cited by:

    1. Alexander M. Danzer & Peter Dolton & Chiara Rosazza Bondibene, 2016. "Who Wins? Evaluating the Impact of UK Public Sector Pension Scheme Reforms," National Institute Economic Review, National Institute of Economic and Social Research, vol. 237(1), pages 38-46, August.
    2. Yu-Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(s1), pages 290-317, July.
    3. Du Caicai & Muysken Joan & Sleijpen Olaf, 2011. "Lessons from the financial crisis: Funded pension funds should invest conservatively," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
      [Short thematic guide to the study of current financial and economic crisis]
      ," MPRA Paper 20743, University Library of Munich, Germany.
    5. Kumara, Ajantha Sisira & Pfau, Wade Donald, 2011. "Lifecycle and fixed portfolio allocation strategies: a performance comparison for emerging market countries," MPRA Paper 31389, University Library of Munich, Germany, revised 10 Jun 2011.
    6. Carmen Petrovici & Jörg Neugschwender, 2014. "Who can (still) afford to retire early? Cross-country comparison of incomes of senior workers and young retirees using LIS data for 2007 & 2010," LIS Working papers 608, LIS Cross-National Data Center in Luxembourg.
    7. Robert L. Brown, 2010. "Retirement 20/20: Innovation in Pension Design," Social and Economic Dimensions of an Aging Population Research Papers 267, McMaster University.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods


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