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ECONOMICS OF SAVINGS AND PENSIONS

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ECONOMICS OF SAVINGS AND PENSIONS

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Academic year 2015/2016

Course ID
ECO0154
Teaching staff
Elsa Maria Fornero (Titolare del corso)
Mariacristina Rossi (Titolare del corso)
Degree course
Finance
Insurance and Statistics
Year
1° anno
Type
Affine o integrativo
Credits/Recognition
6
Course disciplinary sector (SSD)
SECS-P/01 - economia politica
Delivery
Tradizionale
Language
Inglese
Attendance
Facoltativa
Type of examination
Orale
Prerequisites
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Sommario del corso

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Course objectives

Apprendimento delle tecniche di base della ottimizzazione interetemporale. Conoscenza dei sistemi pensionistici a ripartizione e contributivi.

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Results of learning outcomes

Padronanza dei concetti quali il risparmio e stock di ricchezza, processo di accumulazione e decumulazione, sistemi pensionistici

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Course delivery

Lezioni ed esercitazioni

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Learning assessment methods

Esame scritto e orale facoltativo

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Support activities

Esercitazioni in laboratorio

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Program

 

1. Content and objectives Pension systems are designed to meet three main objectives: to allow people to smooth consumption in their life cycle; to prevent poverty in old age; to establish a compact among generations. These goals, in their turn, are meant to insure individual risk, to overcome individual planning limitations and to provide some sharing for aggregate risks. Within the first category of risks, longevity and earnings risks are predominant; within the second, myopia and time inconsistency have to be addressed; within the third, demographic, economic and political risks should be as much diversified as possible.
Starting from this framework, the course aims at placing European pension systems and reforms in the context of the economic theory of households’ savings, where imperfect and incomplete (financial and insurance) markets make room for the state to play an insurer’s role, besides its traditional redistributive tasks. The logic behind the “insurance perspective” does not imply giving up the traditional objective of solidarity, both within and between generations; indeed, this aim is strengthened by highlighting the key role of risk diversification. Furthermore, thanks to an analytical framework based on insurance, measures aimed at achieving a given distributional goal are easily designed; while, if the insurance framework is ignored, redistribution in practice ends up with unforeseen and undesirable features.
2. Learning outcomes
1) Knowledge and understanding Economic and psychological determinants of savings; functioning of both public and private pension systems; incentive and redistributive effects of pension systems. 2) Applying knowledge and understanding Application are possible to both simulation and econometric models. 3) Making judgments Improving the ability to understand the economic determinants of savings, to evaluate the costeffectiveness of different insurance programs, to compare the cost of different saving products. 4) Communication skills To acquire greater precision of concepts and language and to learn the economics behind welfare programs 5) Learning skills For a successful in learning, students must acquire a good familiarity with economic, financial and risks concepts
3. Covered topics are: i. Microeconomic foundations of retirement savings • Basic deterministic saving models: the LCH and the PIH (intertemporal optimization models: assumptions and main results) • Introducing uncertainty • Certainty Equivalence • Permanent Income Hypothesis
• Euler Equation • Precautionary savings • Life uncertainty and its effects. • The introduction of (actuarially fair) life insurance and the dominance of annuities • Why is the market for annuities everywhere so thin? • Why are reverse mortgages almost ignored?
ii. An economic analysis of social security (micro and macroeconomic features of social security) • Financing mode: PAYG vs. Funding • Pension formulae (DB vs. DC) • Actuarial fairness and neutrality • Measures of financial sustainability • Measures of adequacy • Redistribution (both within and between generations) • Incentive structure • (Induced) retirement • The aggregate pension wealth (debt) iii. Theoretical and empirical models of retirement • Stylised facts about retirement • Determinants of retirement choice • The implicit tax on postponing retirement (and related measures)
iv. The economics of pension reforms and the importance of Economic-Financial Literacy
• A political economic approach to social security • Assessing the political sustainability of social security reforms • EFL: concept, measurement, stylized facts, consequences of illiteracy
4. Course organization Lectures, followed by discussions, and possibly a written composition at the end of the course.
5. Minimum requirements  Basic quantitative and economic courses (microeconomics and public finance);  Attendance of lectures
6. Selected Readings (Students may select one or two according to their specific interests)

Suggested readings and bibliography

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1. Browning, M., A. Lusardi, 1996, “Household Saving: Micro Theories and Micro Facts”, Journal of Economic Literature, 34, 1797-1855. 2. Barr N, P. Diamond, Reforming Pensions, http://ssrn.com/abstract=1315444 3. Coronado J. L., D. Fullerton, T. Glass, 1999, “Distributional Impacts of Proposed Changes to the Social Security System in Tax Policy and the Economy, Vol. 13, Poterba, Jim, ed., 1999, pp. 149-186. 4. Diamond P. and P. Orszag, 2004, Saving Social Security. A Balanced Approach, Brookings Institution Press, Washington DC. 5. Diamond Peter, 2005, “Social Security Rules that Vary with Age”, in: Fornero, E. and P. Sestito (eds), 2005, Pension Systems: Beyond Mandatory Retirement, Cheltenham: Edward Elgar . 
6. Diamond, P. 2004, ‘Social Security’, The American Economic Review, 94(1), March 2004 7. Disney, R., “Actuarial-based public pension systems”, in: G. Clark, A. Munnell and M. Orszag, The Oxford Handbook of Pensions and Retirement Income, OUP, 2006. 8. Fenge R. and Pestieau P., 2005, “Social Security and Early Retirement”, Cesifo Book Series, the MIT Press. 
9. French E, 2005, The Effects of Health, Wealth and Wages on the Labour Supply and Retirement, Review of Economic Studies, vol 72, no 2, Aprile, 395-427. 10. Fornero E, A Lusardi, C Monticone, Adequacy of Saving for Old Age in Europe, prepared for the ESF Forward Look project Ageing, Health and Pensions in Europe (the Hague, April 22nd, 2009) 
11. Fornero E., Economic-financial literacy and (sustainable) pension reforms: why the former is a key ingredient for the latter, Bankers, Markets & Investors, 134, January-February 2015. 
12. Geanakoplos J., O.S. Mitchell, S. P. Zeldes, 1998, “Social Security Money’s Worth”, PaineWebber WP Series in Money, Economics and Finance 98-05, Columbia Business School, August. 
13. Gourinchas P.O., Parker J., 2002, “Consumption over the life cycle” Econometrica, vol. 70, no 1 (January, 47-89 
14. Gruber J., D. Wise (eds.), 1999, Social Security and Retirement Around the World, Chicago: University of Chicago Press. 15. Lindbeck A. and M. Persson, 2003, “The Gains from Pension Reform”, Journal of Economic Literature, vol. 41 (1), pp. 74-112. 16. Mitchell O. S., S. P. Zeldes, 1996, “Social Security Privatization: a Structure for Analysis”, American Economic Review, 86(2), pp: 363-67. . 17. Scholtz K. Seshadri A., Khitatrakun S., 2006, “Are Americans Saving “Optimally” for Retirement?” Journal of Political Economy, 114(4), pp. 607-643. 
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