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Impact of Pension System Structure on International Financial Capital Allocation

Author

Listed:
  • James Staveley-O'Carroll

    (Economics Division, Babson College)

  • Olena M. Staveley-O'Carroll

    (Department of Economics, College of the Holy Cross)

Abstract
Government pension systems vary widely from country to country. Evidence from a cross-section of 110 countries indicates that structural differences in public pension programs are related to reallocation of financial capital around the world. More specifically, we find that greater amounts of pension spending are associated with overall net international indebtedness and a net portfolio characterized by equity assets and debt liabilities. We present a two-country overlapping-generations model that can replicate these empirical regularities and elucidate the link between the structure of pension benefits and the resulting portfolio choices of economic agents. In the country with state-guaranteed pension benefits, workers face a lower overall riskiness of lifetime wealth. As a result, they are willing to invest in risky equity financed by the selling of domestic bonds. Workers in the country with no pension system, on the other hand, tend to be net savers and favor safe debt assets in their portfolio. These findings can help to explain the buildup of global financial imbalances over the last three decades as well as to analyze future changes in capital allocation patterns due to the ongoing pension system reforms in many developing and developed countries.

Suggested Citation

  • James Staveley-O'Carroll & Olena M. Staveley-O'Carroll, 2016. "Impact of Pension System Structure on International Financial Capital Allocation," Working Papers 1601, College of the Holy Cross, Department of Economics.
    • Handle: RePEc:hcx:wpaper:1601
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    Cited by:

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    2. Mădălina Gabriela ANGHEL & Constantin ANGHELACHE, 2018. "Analysis of the evolution of the number of pensioners and pensions in Romania," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(615), S), pages 187-194, Summer.
    3. James Staveley-O'Carroll & Olena Staveley-O'Carroll, 2019. "International Welfare Spillovers of National Pension Schemes," Working Papers 1903, College of the Holy Cross, Department of Economics.
    4. Staveley-O’Carroll, James & Staveley-O’Carroll, Olena M., 2019. "International risk sharing in overlapping generations models," Economics Letters, Elsevier, vol. 174(C), pages 157-160.

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    More about this item

    Keywords

    global imbalances; international portfolio choice; portfolio risk; pay-as-you-go system; OLG model;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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