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Risk Management of Pension Systems from the Perspective of Loss Aversion

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  • Johannes Binswanger

Abstract

This paper studies pension design from a risk management point of view using a lexicographic loss aversion model. Interest in this model stems from the fact that it explains income expansion paths of equity and total savings particularly well. I find that all income groups are likely to benefit from a PAYGO system, even in the absence of any redistribution. Optimal equity investments are close to zero for the two bottom income quintiles and increase sharply for higher incomes. The results are compared to optimal pension plans under HARA preferences. I find that a PAYGO system has higher value under loss aversion than in the HARA case. Moreover, equity shares correspond more closely to empirical observations.

Suggested Citation

  • Johannes Binswanger, 2005. "Risk Management of Pension Systems from the Perspective of Loss Aversion," CESifo Working Paper Series 1572, CESifo.
  • Handle: RePEc:ces:ceswps:_1572
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    References listed on IDEAS

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    Cited by:

    1. Kai Konrad & Stergios Skaperdas, 2012. "The market for protection and the origin of the state," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 417-443, June.

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    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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