Generational Accounting, Solidarity and Pension Losses

Abstract

The creeping stock market collapse eroded the wealth of funded pension systems. This led topolitical tensions between generations due to the fuzzy definition of property rights on thepension funds wealth. We argue that this problem can best be resolved by the introduction ofgenerational accounts. Using modern portfolio and consumption planning theory we showthat the younger generations should have the higher equity exposure due to their humancapital. Capital losses should be distributed smoothly over lifetime consumption. When stockmarkets are depressed equity should be bought, savings and consumption should be scaleddown equiproportionally, and retirement should be postponed. Portfolio investmentrestrictions are quite costly.

Keywords: financial institutions, social security and public pensions, pension funds, private pensions, saving and investment

JEL Classification: E2, G2, G23, J32, H55