No. 11/2002
DESIGNING SOCIAL SECURITY A PORTFOLIO CHOICE APPROACH
Egil Matsen
Øystein Thøgersen
Abstract:
Public social security systems may provide diversification of risks to
individuals life-time income. Capturing that a pay-as-you-go program
(paygo) may be considered as a quasiasset, we study the optimal
size of the social security program as well as the optimal split between
a funded part and a paygo part by means of a theoretical portfolio choice
approach. A low-yielding paygo system can benefit individuals if it contributes
to hedge other risks to their lifetime resources. Moreover, a funded part
of the social security system can be justified by potential imperfections
to the individuals free access to the stock market. Numerical
calculations for Sweden, Norway, the US and the UK demonstrate that the
optimal size of paygo-part of the pension program varies considerably
in response to differences in projected growth rates and the correlation
between stock returns and growth. Our calculations suggest that a paygo
program has an important role in the three former countries but
not in the U.K.
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