On the Optimal Degree Of Funding Of Public Sector Pension Plans

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Abstract

Abstract: This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages20
Volume2013-011
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-011

Fingerprint

Pension plans
Funding
Public sector
Pay-as-you-go tax
Tax
Excess returns
Pensions
Risk capital
Burden
Wages
Optimal portfolio choice
Trade-offs
Income
Obligation
Workers
Human capital
Relative weight
Risk aversion
Redistribution
Financial risk

Keywords

  • public sector pension plans
  • funding
  • implicit debt
  • portfolio approach

Cite this

Meijdam, A. C., & Ponds, E. H. M. (2013). On the Optimal Degree Of Funding Of Public Sector Pension Plans. (CentER Discussion Paper; Vol. 2013-011). Tilburg: Economics.
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Meijdam, AC & Ponds, EHM 2013 'On the Optimal Degree Of Funding Of Public Sector Pension Plans' CentER Discussion Paper, vol. 2013-011, Economics, Tilburg.

On the Optimal Degree Of Funding Of Public Sector Pension Plans. / Meijdam, A.C.; Ponds, E.H.M.

Tilburg : Economics, 2013. (CentER Discussion Paper; Vol. 2013-011).

Research output: Working paperDiscussion paperOther research output

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N2 - Abstract: This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.

AB - Abstract: This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.

KW - public sector pension plans

KW - funding

KW - implicit debt

KW - portfolio approach

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ER -

Meijdam AC, Ponds EHM. On the Optimal Degree Of Funding Of Public Sector Pension Plans. Tilburg: Economics. 2013. (CentER Discussion Paper).