Working Paper: NBER ID: w0910
Authors: Robert C. Merton
Abstract: Using the known result that life-cycle investors will optimally hold portfolios whose returns are perfectly correlated with aggregate consumption, this paper uses a simple intertemporal general equilibrium model to explore the merits and feasibility of pension plans where both accumulations and benefits are linked to aggregate per capita consumption. Although the analysis is made within the framework of a public pension plan, it applies equally well to organized private pension plans where participation is virtually mandatory and where individually designed programs are not practical. An additional feature of the plans examined is that they provide for life annuities during both the accumulation and retirement phases of the life cycle.
Keywords: Pension Plans; Consumption Indexing; Lifecycle Investing
JEL Codes: H55; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of pension plans (H55) | retirement consumption levels (J26) |
| mandatory contributions linked to consumption (E20) | retirement consumption levels (J26) |
| structure of pension plans (H55) | financial well-being of retirees (D14) |
| mandatory contributions linked to consumption (E20) | financial well-being of retirees (D14) |
| pension accumulations and benefits linked to aggregate per capita consumption (H55) | standard of living of retirees (J26) |
| structure of pension plans (H55) | risk of retirees falling below a standard of living (J26) |