Return, risk, and the preferred mix of PAYG and funded pensions

Marcel Lever, T.O. Michielsen, Sander Muns

Research output: Working paperOther research output

Abstract

Population aging depresses returns on PAYG financed pensions, while low interest rates depress the return on funded pensions. This paper explores return, risk, and the preferred long-run mix of PAYG and funded pensions. On the one hand, the expected return on funded assets is substantially higher than the expected return of the PAYG pillar, partially due to aging of the population. On the other hand, PAYG pensions are less volatile than funded pensions, as the growth of the wage sum is less uncertain than asset returns if a 50-50 asset mix in fixed income and equity is assumed. To diversify risks stemming from demography and asset markets, a mix of PAYG and funded pensions is socially preferable. In the absence of within-cohort heterogeneity and transition effects, a transition from a 50-50 mix towards a larger PAYG pillar is only warranted at high levels of risk aversion.
Original languageEnglish
Place of PublicationTilburg
PublisherNETSPAR
Number of pages38
Publication statusPublished - Nov 2017
Externally publishedYes

Publication series

NameNetspar Design Paper
Volume92

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Pay-as-you-go tax
Pensions
Risk and return
Expected returns
Equity
Population aging
Wages
Asset markets
Return on assets
Cohort
Asset returns
Interest rates
Assets
Risk aversion
Demography
Fixed income

Cite this

Lever, M., Michielsen, T. O., & Muns, S. (2017). Return, risk, and the preferred mix of PAYG and funded pensions. (Netspar Design Paper; Vol. 92). Tilburg: NETSPAR.
Lever, Marcel ; Michielsen, T.O. ; Muns, Sander. / Return, risk, and the preferred mix of PAYG and funded pensions. Tilburg : NETSPAR, 2017. (Netspar Design Paper).
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Lever, M, Michielsen, TO & Muns, S 2017 'Return, risk, and the preferred mix of PAYG and funded pensions' Netspar Design Paper, vol. 92, NETSPAR, Tilburg.

Return, risk, and the preferred mix of PAYG and funded pensions. / Lever, Marcel; Michielsen, T.O.; Muns, Sander.

Tilburg : NETSPAR, 2017. (Netspar Design Paper; Vol. 92).

Research output: Working paperOther research output

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Lever M, Michielsen TO, Muns S. Return, risk, and the preferred mix of PAYG and funded pensions. Tilburg: NETSPAR. 2017 Nov. (Netspar Design Paper).