Designing social security – a portfolio choice approach

Abstract

Public social security systems may provide diversification of risks to individuals' life-time income. Capturing that a pay-as-you-go program (paygo) may be considered as a "quasiasset", we study the optimal size of the social security program as well as the optimal split between a funded part and a paygo part by means of a theoretical portfolio choice approach.A low-yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources. Moreover, a funded part of the social security system can be justified by potential imperfections to the individuals' free access to the stock market. Numerical calculations for Sweden, Norway, the US and the UK demonstrate that the optimal size of paygo-part of the pension program varies considerably in response to differences in projected growth rates and the correlation between stock returns and growth. Our calculations suggest that a paygo program has an important role in the three former countries -but not in the U.K. JEL Classification: H55, D91, G11

Intergenerational risk-sharing through funded pensions and public debt

“…However, in contrast to Matsen & Thøgersen (2004), who evaluates welfare only in the second period of an individual's life, the current paper evaluates welfare of future generations over many periods, including the working years. Borsch-Supan et al (2006) study the effects of ageing and pension reforms on international capital markets using an OLG model with multiple countries.…”

“…Examples are Matsen & Thøgersen (2004); Borsch-Supan et al (2006) and Beetsma & Bovenberg (2009). Matsen & Thøgersen (2004) investigates the optimal split between a PAYG pillar and a DC funded pillar in the context of two-OLG model with wage income, the population size and the equity return as the risk factors.…”

Pensions, Debt and Inflation Risk in a Monetary Union

“…This approach is also taken by Matsen and Thøgersen (2004) who develop a partial equilibrium model where the PAYG pension system is treated as a 'quasi-asset' and derive the optimal share invested in this PAYG asset. They assume that people only consume in the second period of life, so that the complete net labour income received in the first period of life is saved.…”

“…They assume that people only consume in the second period of life, so that the complete net labour income received in the first period of life is saved. In contrast to Matsen and Thøgersen (2004) I model the savings decisions of individuals and more importantly, I develop a general equilibrium model where the effects on the rates of return are taken into account. This is one of the advantages of the model in this paper; because it is a general equilibrium model both the optimal portfolio choice and the equity premium can be derived at the same time.…”

Savings for retirement under liquidity constraints: A note

“…Contributions from Dutta et al (2000), Wagener (2003), Matsen andThogersen (2004) De Menil et al (2006) and Corsini and Spataro (2011) cover the topic of decisions on retirement for saving and on pension plans but none of them focus on the role of liquidity constraints nor examine in details the emergence of corner solutions.…”