Funded and Unfunded Pensions: Risk, Return and Welfare

David Miles

No 2369, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper uses stochastic simulations on calibrated models to assess the optimal degree of reliance on funded pensions and on a particular type of unfunded (PAYG) pension. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system. This paper calculates the expected welfare of agents in different economies where in the steady state the importance of PAYG pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts.

Keywords: Annuities; Pensions; Risk-sharing (search for similar items in EconPapers)
JEL-codes: D91 G22 H55 J14 (search for similar items in EconPapers)
Date: 2000-02
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Citations: View citations in EconPapers (2)

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