Working Paper: CEPR ID: DP2369
Authors: David Miles
Abstract: This paper uses stochastic simulations on calibrated models to assess the optimal degree of reliance on funded pensions and on a particular type of unfunded (PAYG) pension. 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. This paper calculates the expected welfare of agents in different economies where in the steady state the importance of PAYG 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.
Keywords: pensions; annuities; risk-sharing
JEL Codes: D91; G22; H55; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average rate of return on assets (G17) | optimal size of unfunded state pensions (H55) |
| efficiency of annuity markets (G14) | optimal size of unfunded state pensions (H55) |
| average rate of return on assets and efficiency of annuity markets (G12) | welfare gains from annuity contracts (G52) |
| efficiency of annuity markets (G14) | overall welfare (I31) |
| perfect annuity markets (D41) | welfare-enhancing role for pensions (H55) |