Generational Accounting, Solidarity and Pension Losses

The stock market collapse led to political tensions between generations due to the fuzzy definition of the property rights over the pension funds’ wealth. The problem is best resolved by the introduction of generational accounts. Modern consumption and portfolio theory shows that the younger generations should have the higher equity exposure due to their human capital. Stock market losses should be distributed smoothly over lifetime consumption by adjusting both current contributions and future entitlements. We present expressions for the substantial welfare losses involved in various practically relevant deviations from the optimal system. <p>This discussion paper resulted in a publication in <A href="http://www.springerlink.com/content/5314861863211591/"'De Economist'</A>, 2006. (154(1), 63-83.