A portfolio approach to the optimal mix of funded and unfunded pensions. Issue 16 (2nd April 2020)

• Record Type: Journal Article
• Authors: Bouhakkou, Léa; Coën, Alain; Folus, Didier
• Is Part Of: Applied economics. Volume 52:Issue 16(2020)
• Page Start: 1733
• Page End: 1744
• Publication Date: 2020-04-02
• Subjects: Portfolio choice -- pension systems -- asset allocation -- social security -- risk sharing; G11 -- H55; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2019.1678728
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: 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 funded and Paygo systems within a mean variance and Bell linear exponential models. Our analysis involves both analytical computations and empirical estimations of optimal values using real long-term data for equity, bonds and the Paygo asset for several OECD countries and several time periods covering the time span 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.