Reforming German Civil Servant Pensions: Funding Policy, Investment Strategy, and Intertemporal Risk Budgeting
Penn collection
Degree type
Discipline
Subject
FUnding
Intertemporal
Risk
Budgeting
Business
Economics
Public Affairs, Public Policy and Public Administration
Funder
Grant number
License
Copyright date
Distributor
Related resources
Author
Contributor
Abstract
We analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for civil servants in Germany, allowing for alternative portfolio mixes using a Monte Carlo framework and a Conditional Value at Risk metric. First, we estimate contributions as a percent of salary that would fully fund future benefit promises for active employees. Second, we identify an investment strategy for plan assets that will minimize worst-case pension costs; this turns out to be 22% in equities, 47% in bonds, and 30% in real estate. Third, we explore the time path of pension fund asset shortfalls and the chances of contribution holidays for current and future generations. We show that moving toward a funded pension system for German civil servants can be beneficial to both taxpayers and civil servants.