Optimal design of funded pension schemes
Bovenberg,A.L. Mehlkopf,R.J.
Bovenberg,A.L.
Mehlkopf,R.J.
Abstract
This article reviews the literature on the optimal design and regulation of funded pension schemes. We first characterize optimal saving and investment over an individual’s life cycle. Within a stylized modeling framework, we explore optimal individual saving and investing behavior. Subsequently, various extensions of the model are considered, such as additional financial risk factors, stochastic human capital, and more elaborate individual preferences. We then turn to the literature on intergenerational risk sharing, which suggests that a long-lived entity such as a pension fund or the government can yield ex ante welfare gains by allowing nonoverlapping generations to trade risk. The scope for this type of intergenerational risk sharing, however, is limited by the ability to commit generations to the contract. These commitment problems raise concerns with respect to sustainability and intergenerational fairness. We explore the role of solvency regulations to address these concerns about intergenerational fairness and discontinuity risk.
Description
Date
2014-08
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
D91 - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, G11 - Portfolio Choice ; Investment Decisions, G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors, SDG 1 - No Poverty, SDG 8 - Decent Work and Economic Growth
Citation
Bovenberg, A L & Mehlkopf, R J 2014, 'Optimal design of funded pension schemes', Annual Review of Economics, vol. 6, pp. 445-474. https://doi.org/10.1146/annurev-economics-080213-040918