Severance Pay or Pension Funds?

Devis Geron ()
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Devis Geron: University of Padova

No 139, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: The paper aims to analyze the determinants of the individual choice of con- tributing to pension funds, particularly by focusing on individual preferences towards the annuitization of the accumulated pension capital. The analysis is performed in the light of the latest reform of social security in Italy, convert- ing the severance pay scheme (the so-called TFR) into a fully funded scheme of pension funds. The model describes the behavior of a representative agent belonging to a representative generation in steady state, in a partial equilibrium setting with mortality risk as well as uncertainty on wages and financial market returns. Investing in riskier but potentially more rewarding pension funds, paying out annuities from retirement onwards, turns out to be slightly welfare improving with respect to contributing to a severance pay scheme eventually paying out a lump-sum amount. Nonetheless, the welfare-based value of insurance provided by private annuities from pension funds is relatively low, mainly due to a) the pre-existence of (sizeable) public annuities, and b) constraints imposed by annuitization on both saving and consumption behavior after retirement. These findings provide further insights into the Òannuity puzzleÓ issue.

Keywords: Social Security Reforms; Uncertainty; Fully Funded Pension Schemes. (search for similar items in EconPapers)
JEL-codes: E62 G23 H31 H55 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-10
New Economics Papers: this item is included in nep-age and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0139

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