A Portfolio Approach to the Optimal Mix of Paygo and Funded Pension Systems

30 Pages Posted: 22 May 2010 Last revised: 3 Oct 2011

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

Université de Paris 1 Panthéon-Sorbonne; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: April 29, 2011


We analyze the rationale for the pay-as-you-go (paygo) pension system existence on diversi…fication grounds. A continuous-time portfolio choice setting is built, basing on Merton (1971)´s analysis, where a reasonable balance between the taking account of the economic and fi…nancial facets of the problem is sought. The optimal portfolio rule is derived, following the usual objectives of speculation and hedging. The existing literature provided some intuitions as to the primordial, and non-evident, role played by the correlation between the stock market and wages for the optimal paygo weight. This paper focuses on this role and derives two analytical results involving the described correlation: the condition for the paygo system usefulness and the one defi…ning the correlation effect direction on the optimal paygo magnitude.

Keywords: social security, unfunded and funded pension systems, optimal portfolio, diversifi…cation, stochastic dynamic programming

JEL Classification: C61, G11, G23, H55

Suggested Citation

Romaniuk, Katarzyna, A Portfolio Approach to the Optimal Mix of Paygo and Funded Pension Systems (April 29, 2011). Available at SSRN: https://ssrn.com/abstract=1613246 or http://dx.doi.org/10.2139/ssrn.1613246

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123

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