The Optimal Portfolio of PAYG Benefits and Funded Pensions in Germany

Christoph Anders and Max Groneck

FinanzArchiv: Public Finance Analysis, 2017, vol. 73, issue 3, 255-291

Abstract: The combination of a pay-as-you-go (PAYG) and a self-funded pension system is studied from a portfolio perspective considering the trade-off between speculation and hedging. We analyze the German PAYG social security system and subsidized private savings (Riester pension). The return and the risk associated with a combination of both systems are simulated in a stochastic economy. Our results suggest that (1) a risk-minimizing structure of total retirement income still allows a fraction 5 percent to be financed via private savings, due to the benefits of hedging, (2) the optimal portfolio shares at a fixed total pension level imply high fractions of private savings even if agents are highly risk-averse, and (3) determining the optimal size of the total pension level under the current social security system implies only low additional private saving rates.

Keywords: Social security; PAYG system; funded pensions; optimal portfolio (search for similar items in EconPapers)
JEL-codes: C53 G11 H55 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1628/001522117X14915570953903

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