An investigation on portfolio choice and wealth accumulation in fully funded pension systems with a guaranteed minimum benefit

In this thesis, we investigate the welfare implications of two risk management measures to reduce the market risk faced by retirees in compulsory defined-contribution (DC) systems. The measures are: investment restrictions on the retirement account and providing a guaranteed minimum benefit. We solve calibrated life-cycle models of optimal consumption and portfolio choice of the retirement account as well as of private savings for borrowing constrained rational agents with incomplete markets. We first investigate the welfare implications of portfolio restrictions in the retirement account. Here, we assume that the retirement account has a favorable tax treatment during working years, whereas the private savings account is subject to taxation. The model is set in partial equilibrium. We find that if one were to compensate agents for giving up their right to invest freely their retirement account, the compensation was substantial. We also show that the tax differential of financial assets has a major effect on the portfolio allocation of the retirement account. We then evaluate the cost of a minimum benefit in a compulsory DC system in partial equilibrium. Here, we assume that there is no taxation on capital gains or interest. We assess the cost of the minimum benefit of two types of guarantees: a flat minimum benefit and an earnings related one. We find an optimal portfolio restriction on the retirement account such that the cost of a flat minimum benefit is minimized. Our results show that reducing the level of a flat minimum benefit does not have a significant impact on social welfare. We also find that the reduction in the cost of the minimum benefit due to portfolio restrictions does not compensate for the welfare loss of portfolio restrictions in the retirement account. Finally, we evaluate the cost of a flat minimum benefit in a general equilibrium framework. Moreover, we investigate the aggregate implications of compulsory DC systems with and without a minimum benefit compared to economies with no pension system assuming economies in steady state and economies with aggregate uncertainty. We find that economies with a compulsory DC pension system are welfare increasing compared to economies with no pension system. We show that this result depends on the definition of the government budget equation. We also find that DC pension systems with a minimum benefit do not improve social welfare compared to DC systems with no minimum benefit either in steady state or outside the steady state.Open Acces