Paper Pension Design in the Presence of Systemic Risk

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 retirees 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. It is also shown that it is optimal to “back- load” mandatory savings towards the end of an agent’s work-life, when borrowing constraints cease to bind.

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