Working Paper: CEPR ID: DP4209
Authors: Casper G. de Vries; Coen N. Teulings
Abstract: The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly.
Keywords: financial institutions; pension funds; private pensions; saving and investment; social security; public pensions
JEL Codes: E20; G20; G23; H55; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in stock prices (G10) | Decrease in total wealth (E21) |
| Decrease in total wealth (E21) | Decrease in consumption across generations (D15) |
| Decline in stock market values (G10) | Significant losses for funded pension systems (G23) |
| Significant losses for funded pension systems (G23) | Political tensions among generations (H60) |
| Younger generations should have higher equity exposure (G51) | Optimal for smoothing consumption over their lifetimes (D15) |
| Capital losses should be distributed evenly across a generation’s lifetime consumption (D15) | Smoother intertemporal consumption patterns (D15) |
| Generational accounts (H60) | Mitigate political tensions regarding pension wealth distribution (H55) |
| Clear definition of property rights (P14) | More equitable distribution of risks and returns (D39) |