Optimal design of funded pension schemes

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)445-474
JournalAnnual Review of Economics
Volume6
Early online date20 Mar 2014
DOIs
Publication statusPublished - Aug 2014

Fingerprint

Pension scheme
Fairness
Intergenerational risk sharing
Investing
Risk factors
Commitment problem
Individual preferences
Pension funds
Life cycle
Human capital
Sustainability
Government
Optimal regulation
Welfare gains
Discontinuity
Solvency
Modeling
Financial risk

Cite this

@article{a8bfbfdbe41c45dab98c7a230ee3e56e,
title = "Optimal design of funded pension schemes",
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.",
author = "A.L. Bovenberg and R.J. Mehlkopf",
year = "2014",
month = "8",
doi = "10.1146/annurev-economics-080213-040918",
language = "English",
volume = "6",
pages = "445--474",
journal = "Annual Review of Economics",
issn = "1941-1391",
publisher = "Annual Reviews Inc.",

}

Optimal design of funded pension schemes. / Bovenberg, A.L.; Mehlkopf, R.J.

In: Annual Review of Economics, Vol. 6, 08.2014, p. 445-474.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Optimal design of funded pension schemes

AU - Bovenberg, A.L.

AU - Mehlkopf, R.J.

PY - 2014/8

Y1 - 2014/8

N2 - 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.

AB - 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.

U2 - 10.1146/annurev-economics-080213-040918

DO - 10.1146/annurev-economics-080213-040918

M3 - Article

VL - 6

SP - 445

EP - 474

JO - Annual Review of Economics

JF - Annual Review of Economics

SN - 1941-1391

ER -