XXVI Edition

14-15-16 December 2017"

A Portfolio Approach to The Optimal Mix of Funded and Unfunded Pensions

Bouhakkou Léa, Université Paris Nanterre
Alain Coën, ESG-UQÀM, University of Quebec in Montreal
Folus Didier , Université Paris Nanterre

In this paper we address the optimal funding of pensions by means of portfolio choice approach. Considering the unfunded (Paygo) pension system as a “quasi-asset” with hedging and diversification properties, we derive the optimal portfolio mix of unfunded and Paygo systems within a Mean Variance and Bell linear exponential models. Our analysis involves both analytical computation and empirical estimations of optimal values using real long term data for equity, bonds and Paygo asset for a sample of eight OECD countries covering the period 1897-2016. We find that in most cases a mix of both systems is desirable with a larger magnitude of Paygo system in the case of the Bell Framework as we capture attitudes towards asymmetry and tail risks that are typical to equity markets.

Area: Young Economists Session (YES award)

Keywords: portfolio choice, asset pricing, pension systems, social security, risk sharing

Paper file

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