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Optimal Design of Pension Funds: A Mission Impossible?
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Journal Article
Optimal Design of Pension Funds: A Mission Impossible?
2003
Overview
Nowadays many employers offer their employees the possibility of an insurance against too large losses in income when retiring or becoming disabled. This paper models the optimization problem of the employer when setting up such a so-called pension fund. Not surprisingly, it turns out that the optimal solution depends on the premium the employees are willing to pay at most for such an insurance. Since this is private information for an employee and hence not known to the employer, he needs to collect information regarding these maximum premiums. It is shown that if employees' characteristics only differ in the maximum premium they are willing to pay, the employer is unable to perfectly inform himself on these maximum premiums, i.e. he cannot create the right incentives for his employees to reveal their maximum premiums truthfully.
