Working Paper: CEPR ID: DP2779
Authors: David Miles; Ales Cerny
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.
Keywords: annuities; demographics; pensions; portfolio allocation; 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 |
|---|---|
| generosity of unfunded pensions (H55) | capital stock (E22) |
| generosity of unfunded pensions (H55) | GDP level (P24) |
| level of state pensions (H55) | allocation of financial wealth to risky assets (G11) |
| generosity of unfunded pensions (H55) | welfare (I38) |
| generosity of unfunded pensions (H55) | savings (D14) |
| generosity of unfunded pensions (H55) | portfolio allocation (G11) |
| generosity of unfunded pensions (H55) | GDP (E20) |
| pension environment (H55) | credit constraints (E51) |