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Optimal life cycle investment with pay-as-you-go pension schemes: a portfolio approach

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  • Willem Heeringa

Abstract

In this paper we show how pay-as-you-go pension schemes impact on the individual.s optimal investment portfolio. Introducing a pay-as-you-go pension scheme implies that human wealth of young generations is transferred to retired generations. As a consequence, individuals will in general invest less conservatively. These portfolio effects gradually disappear at the end of life.

Suggested Citation

  • Willem Heeringa, 2008. "Optimal life cycle investment with pay-as-you-go pension schemes: a portfolio approach," DNB Working Papers 168, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:168
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    File URL: https://www.dnb.nl/binaries/Working%20Paper%20168-2008_tcm46-170650.pdf
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    References listed on IDEAS

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    1. S. Fischer, 1974. "The Demand for Index Bonds," Working papers 132, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. De Jong, Frank, 2008. "Valuation of pension liabilities in incomplete markets," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(03), pages 277-294, November.
    3. Matsen, Egil & Thogersen, Oystein, 2004. "Designing social security - a portfolio choice approach," European Economic Review, Elsevier, vol. 48(4), pages 883-904, August.
    4. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-534, June.
    5. Persson, Mats, 2000. "Five Fallacies in the Social Security Debate," Seminar Papers 686, Stockholm University, Institute for International Economic Studies.
    6. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
    7. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    8. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    9. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    10. Marshall, David A, 1992. " Inflation and Asset Returns in a Monetary Economy," Journal of Finance, American Finance Association, vol. 47(4), pages 1315-1342, September.
    11. Michael J. Brennan & Yihong Xia, 2002. "Dynamic Asset Allocation under Inflation," Journal of Finance, American Finance Association, vol. 57(3), pages 1201-1238, June.
    12. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics,in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
    13. Sanchez-Marcos, Virginia & Sanchez-Martin, Alfonso R., 2006. "Can social security be welfare improving when there is demographic uncertainty?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1615-1646.
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    Cited by:

    1. Jacob A. Bikker & Dirk W. G. A. Broeders & David A. Hollanders & Eduard H. M. Ponds, 2012. "Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 595-618, September.
    2. repec:eee:hapoch:v1_567 is not listed on IDEAS

    More about this item

    Keywords

    Social security; Risk sharing; Portfolio choice;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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