Pension Design in the Presence of Systemic Risk
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
December 30, 2010
I consider the possibility that individual agents’ savings and portfolio choices can have negative externalities on public finances, whenever retirement consumption drops below a minimum level. Within this framework, I discuss optimal pension design. I show the optimality of two policies. The first policy mandates that agents use part of their accumulated assets to purchase a claim providing a fixed income stream for the duration of their life. The second policy mandates the purchase of an appropriately structured portfolio insurance policy. Both policies are financed by an appropriate mandatory minimum savings requirement, while the agent is still a worker.
Number of Pages in PDF File: 59
Keywords: Continuous Time Optimization, Life Cycle Savings And Portfolio Choice, Ricardian Equivalence, Borrowing Constraints, Optimal Contracts
JEL Classification: C6, D6, D9, E2, E6, G1
Date posted: March 4, 2010 ; Last revised: December 30, 2010