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A small stochastic model of a pension fund with endogenous saving

  • Jan Bonenkamp


  • Martijn van de Ven
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    We live in an uncertain world, yet a lot of research into the sustainability of welfare states is done in the context of certainty. There are good reasons why the analysis is mostly confined to a model of a certain world. A full analysis of the sustainability of welfare states which includes all relevant economic interactions is already intricate in a certain world because it requires the use of complex dynamic general equilibrium models. Even without stochastics, understanding all the mechanisms and its results is sometimes difficult. In addition, when building stochastics into these type of models one may run into the limitations of computer capacity. In this paper we investigate whether uncertainty on the real rate of return on capital and productivity growth (labelled as economic uncertainty) is more or less important than mortality and fertility uncertainty (labelled as demographic uncertainty) for a consumer facing a decision how much to save. Furthermore we look at the errors that are made when uncertainty is neglected in consumer behaviour. The results indicate that economic uncertainty is far more important than demographic uncertainty. The welfare costs of neglecting uncertainty in consumer behaviour seem to be small.

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    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Memorandum with number 168.

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    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:cpb:memodm:168
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    1. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
    2. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
    3. 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.
    4. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-99, April.
    5. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Alan J. Auerbach & Kevin A. Hassett, 1999. "Uncertainty and the Design of Long-Run Fiscal Policy," NBER Working Papers 7036, National Bureau of Economic Research, Inc.
    7. Eric M. Engen & Jonathan Gruber, 1995. "Unemployment Insurance and Precautionary Saving," NBER Working Papers 5252, National Bureau of Economic Research, Inc.
    8. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
    9. Luis M. Viceira, 1999. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," NBER Working Papers 7409, National Bureau of Economic Research, Inc.
    10. Ronald D. Lee & Ryan D. Edwards, 2001. "The fiscal impact of population change," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 46.
    11. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
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