Preface xi
1 Introduction
1.1 What is pension economics? 1
1.2 Types of pension scheme 3
1.3 Conclusions 10
Questions 10
References 11
2 Individual Pension Decision Making 13
2.1 The lifecycle model 13
2.2 Pensions and savings 19
2.2.1 Unfunded state pension 19
2.2.2 Private funded pension 20
2.3 Pensions and retirement decisions 23
2.3.1 No pension 23
2.3.2 Private funded pension 24
2.3.3 Unfunded state pension 25
2.3.4 Unfunded state pension with private funded pension 26
2.4 Empirical studies testing the validity of the lifecycle model 28
2.5 The Feldstein lifecycle model with induced retirement 30
2.5.1 The consumption decision 32
2.5.2 Retirement behaviour 37
2.5.3 Discussion 38
2.6 Conclusions 39
Questions 40
References 41
3 Corporate Pension Decision Making 47
3.1 The provision of pensions by corporations 47
3.2 The role of pensions in employment contracts 48
3.2.1 Pensions as altruism 48
3.2.2 Pensions as deferred pay 49
3.2.3 Pensions as contingent claims 60
3.3 The nature of corporate pension liabilities 61
3.4 Quitting and mandatory retirement 64
3.4.1 Quitting 64
3.4.2 Mandatory retirement 66
3.5 Tax and pension fund policy 68
3.6 Agency costs in pension schemes and pension funds 71
3.6.1 Insider-trustees 72
3.6.2 Underfunding the pension scheme 75
3.6.3 Performance-related fund management fees 80
3.6.4 Shareholder activism and corporate governance 81
3.6.5 Moral hazard, adverse selection and disability pensions 82
3.7 Conclusions 83
Questions 84
References 85
4 Pensions in the Diamond-Samuelson Overlapping Generations Model with Certain Lifetimes 89
4.1 The two-period Diamond-Samuelson OLG model 90
4.1.1 Individuals 91
4.1.2 Firms 98
4.1.3 Market equilibrium 100
4.1.4 Dynamics, stability and the steady state 101
4.1.5 Optimality and efficiency 103
4.2 Pensions in the Diamond-Samuelson OLG model with exogenous labour supply and retirement 105
4.2.1 State pension scheme 106
4.2.2 The equivalence of PAYG and government debt 117
4.2.3 Transitional and welfare effects 120
4.2.4 From PAYG to a funded pension scheme 121
4.3 PAYG pensions in the Diamond-Samuelson OLG model with endogenous labour supply and retirement 122
4.3.1 Individuals 122
4.3.2 Market equilibrium 125
4.3.3 The steady state 126
4.3.4 Welfare effects 129
4.3.5 From PAYG to a funded pension scheme 132
4.4 Conclusions 132
Questions 133
References 135
5 Pensions in the Blanchard-Yaari Overlapping Generations Model with Uncertain Lifetimes 137
5.1 The Blanchard-Yaari OLG model with uncertain lifetimes 137
5.1.1 Yaari's contribution 137
5.1.2 Blanchard's contribution 142
5.1.3 Individuals 142
5.1.4 Aggregate consumption 144
5.1.5 Firms 147
5.1.6 Government and market equilibrium 148
5.1.7 The phase diagram 149
5.2 PAYG pensions in the Blanchard-Yaari OLG model with endogenous labour supply and mandatory retirement 152
5.3 Conclusions 154
Questions 155
References 156
6 The Economics of Ageing and Generational Accounting 157
6.1 The macroeconomic effects of ageing: Declining population growth and the increasing dependency ratio 157
6.2 Pensions in the Diamond-Samuelson OLG model with a variable population growth rate 161
6.3 Generational accounting 164
6.4 Conclusions 167
Questions 168
References 168
7 Risk Sharing and Redistribution in Pension Schemes 171
7.1 Risks in private pension schemes 174
7.2 Risk sharing in personal pension schemes 175
7.3 Risk sharing in occupational pension schemes 177
7.3.1 Complete markets 178
7.3.2 Incomplete markets 180
7.4 Redistribution in private pension schemes 188
7.5 Private sector market failure and the compensating role of state pension schemes 191
7.6 Risks in state pension schemes 192
7.7 Risk sharing in state pension schemes 196
7.7.1 The family 197
7.7.2 Social security pension system 198
7.8 Redistribution in state pension schemes 206
7.9 The viability of PAYG state pension systems and the transition costs to funding 206
7.9.1 Viability 206
7.9.2 The transition deficit 210
7.10 Conclusions 213
Questions 215
References 217
8 Behavioural Pension Economics 221
8.1 The accumulation phase 222
8.1.1 The savings decision 222
8.1.2 The investment decision 227
8.2 The decumulation phase 238
8.2.1 Longevity risk 238
8.2.2 Inflation and capital market risk 239
8.3 Conclusions 240
Questions 242
References 243
Index 249
