Labor Income and the Design of Default Portfolios in Mandatory Pension Systems: An Application to Chile
Governments often impose choices regarding the levels of savings and the composition of the portfolio of assets in mandatory pension systems; either the share of pay-as-you-go vs. financial assets or the structure of default portfolios to which a majority of workers stick. Yet, it is well known that the optimal savings rate and the structure of the portfolio of assets depend on individual preferences and the properties of human capital. For example, workers whose labor income is very volatile or is highly correlated with the returns on risky financial assets should tilt their portfolios towards safe assets early in life. In this paper we explore the potential welfare gains derived from incorporating this basic principle into the design of the default portfolios offered by DC pension plans, based on the case of the Chilean pension system. We estimate the properties of labor earnings for several representative individuals, simulate their optimal life-cycle portfolio choices and compare with the current institutional defaults. We find very sizable welfare improvements for several of the groups of workers studied. The results suggest that policymakers should take into account education and occupation when defining portfolio defaults. These principles apply more generally to the choice between pay-as-you-go vs. financial assets – and we argue – could improve incentive for some groups to contribute.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Solange Berstein & Olga Fuentes & Nicolás Torrealba, 2011. "Esquema de Multifondos en Chile," Working Papers 43, Superintendencia de Pensiones, revised Jan 2011.
- Cristóbal Huneeus & Andrea Repetto, 2005.
"The Dynamics of Earnings in Chile,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Jorge Restrepo & Andrea Tokman R. & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.), Labor Markets and Institutions, edition 1, volume 8, chapter 12, pages 383-410
Central Bank of Chile.
- Cristóbal Huneeus & Andrea Repetto, 2004. "The Dynamics of Earnings in Chile," Documentos de Trabajo 183, Centro de Economía Aplicada, Universidad de Chile.
- Andrea Repetto & Cristobal Huneeus, 2004. "The Dynamics of Earnings in Chile," Econometric Society 2004 Latin American Meetings 251, Econometric Society.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bovenberg, A.L. & Koijen, R.S.J. & Nijman, T.E. & Teulings, C.N., 2007. "Saving and investing over the life cycle and the role of collective pension funds," Other publications TiSEM 6eab1341-eda5-4f21-8c06-8, Tilburg University, School of Economics and Management.
- Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
- Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
- Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers 702, Stockholm University, Institute for International Economic Studies.
- Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
- Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
- Solange Berstein & Olga Fuentes & Nicolás Torrealba, 2011. "La Importancia de la Opción por Omisión en los Sistemas de Pensiones de Cuentas Individuales," Working Papers 44, Superintendencia de Pensiones, revised Jan 2011.
- David Miles & Ales Cerny, 2006. "Risk, Return and Portfolio Allocation under Alternative Pension Systems with Incomplete and Imperfect Financial Markets," Economic Journal, Royal Economic Society, vol. 116(511), pages 529-557, 04. Full references (including those not matched with items on IDEAS)