Intergenerational Effects of Guaranteed Pension Contracts
28 Pages Posted: 13 Mar 2007
Date Written: October 2006
Abstract
In this paper we show that there exist an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation.
Keywords: Portfolio Choice, Life and Pension Insurance, Interest Rate Guarantees
JEL Classification: G11, G13, G22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income
-
Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
By Laurent E. Calvet, John Y. Campbell, ...
-
Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
By Laurent E. Calvet, John Y. Campbell, ...
-
Hedging, Familiarity and Portfolio Choice
By Massimo Massa and Andrei Simonov
-
Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence
-
Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence
-
Investing Retirement Wealth: a Life-Cycle Model
By John Y. Campbell, Joao F. Cocco, ...