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Risk Return and Portfolio Allocation under Alternative Pension Systems with Imperfect Financial Markets

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Listed author(s):
  • Cerny, Ales
  • Miles, David K

Abstract

This Paper uses stochastic simulations on calibrated models to assess the steady state impact of different pension arrangements in an environment where financial markets are less than perfect. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system and where there are imperfections in financial markets (eg transaction costs or adverse selection). This Paper calculates the expected welfare of agents in different economies where in the steady state the importance of unfunded state pensions differs. We estimate how the optimal level of unfunded state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts. We focus on the case of Japan where ageing is rapid and unfunded pensions are currently generous.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2779.

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Date of creation: May 2001
Handle: RePEc:cpr:ceprdp:2779
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Keywords: Annuities; Demographics; Pensions; Portfolio Allocation; Risk-Sharing;

Find related papers by JEL classification:

  • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
  • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
  • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
  • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

References listed on IDEAS
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  16. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
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  22. Martin Feldstein, 2009. "Reducing the Risk of Investment-Based Social Security Reform," NBER Chapters,in: Social Security Policy in a Changing Environment, pages 201-218 National Bureau of Economic Research, Inc.
  23. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 83-114, June.
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  30. repec:cup:macdyn:v:1:y:1997:i:1:p:7-44 is not listed on IDEAS
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  33. David Miles & Allan Timmermann, 1999. "Risk sharing and transition costs in the reform of pension systems in Europe," Economic Policy, CEPR;CES;MSH, vol. 14(29), pages 251-286, October.
  34. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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