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Pension income indexation: a mean-variance approach

Author

Listed:
  • Rodrigo Lluberas

    (Banco Central del Uruguay)

Abstract

In this paper, we propose a theoretical framework to study pension income indexation from the pensioners' point of view. We then use the theoretical model to calculate the optimal indexation measure for different cohorts of pensioners using historical data from Uruguay. Our results suggest that for most of the cohorts, but particularly for those retiring in the 1970s and 1990s, the optimal strategy is to choose the Consumer Price Index (CPI) as the pension income indexation measure. Even for cohorts retiring after the 1989 Constitutional reform that established the Average Nominal Earnings Index (ANEI) as the indexation measure, the CPI is still the preferred indexation measure. To show the robustness of the results, we present two alternative criteria to assess the convenience of each indexation measure and arrive to similar results.

Suggested Citation

  • Rodrigo Lluberas, 2016. "Pension income indexation: a mean-variance approach," Documentos de trabajo 2016009, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2016009
    as

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    References listed on IDEAS

    as
    1. Ian Crawford, 1994. "UK household cost-of-living indices, 1979-92," Fiscal Studies, Institute for Fiscal Studies, vol. 15(4), pages 1-28, January.
    2. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    3. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    4. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    5. Rodrigo Lluberas, 2018. "Life‐Cycle Expenditure and Retirees’ Cost of Living," Fiscal Studies, John Wiley & Sons, vol. 39(3), pages 385-415, September.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D60 - Microeconomics - - Welfare Economics - - - General

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