Observations on the Indexation of Old Age Pensions

Lawrence Summers

No 1023, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines some positive and normative aspects of the inflation indexation of public and private pensions. The analysis showsthat alternative indexing arrangements may have far less impact on actual patterns of risk bearing than is usually thought to be the case. In so far as inflation indexing has real effects, there is no presumption that they are beneficial. In particular, the pre-commitment aspects of publicindexing may not be efficient. There are sound reasons to believe that voluntarily agreed on, non-indexed private pensions may well be efficient.Non-indexed pensions may result in an efficient allocation of risks given the other assets and liabilities of pension issuers and beneficiaries. In this case, indexation would impede the efficient allocation of risks. In this paper is also developed an ICOLI (interteinporal cost of living index) which is superior to conventional price indices as a way of evaluating the changes in real well being,associated with changes in wealth. The use of this measure has significant implications for the indexation of pensions, and for the question of what assets should be held in pension portfolios.

Date: 1982-11
Note: PE
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Published as Summers, Lawrence H. "Observations on the Indexation of Old Age Pensions." Financial Aspects of the U.S. Pension System, edited by Zvi Bodie and John B. Shoven. Chicago: UCP, (1983), pp. 231-251 and 257-258.
Published as Observations on the Indexation of Old Age Pensions , Lawrence H. Summers. in Financial Aspects of the United States Pension System , Bodie and Shoven. 1983

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