The Optimal Mix Between Funded and Unfunded Pension Systems When People Care About Relative Consumption

Markus Knell

Economica, 2010, vol. 77, issue 308, 710-733

Abstract: The paper studies the optimal portfolio mix between funded and unfunded pension systems when people care about relative consumption. In pay‐as‐you‐go systems with fixed contribution rates, pensions are tied to wages. This lowers the uncertainty of individuals' future relative position thereby increasing the attractiveness of unfunded systems. The paper shows analytically that the optimal share of funding decreases with the importance of relative standing. A calibrated version of the model suggests that the concern for relative standing has also a quantitatively important impact on the optimal share of funding. For reasonable assumptions it is typically around 20%.

Date: 2010
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https://doi.org/10.1111/j.1468-0335.2009.00797.x

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Working Paper: The Optimal Mix Between Funded and Unfunded Pensions System When People Care About Relative Consumption (2008)
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