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Does retirement flexibility provide a hedge against macroeconomic risk?*

Published online by Cambridge University Press:  03 October 2016

YVONNE ADEMA ,
JAN BONENKAMP  and
LEX MEIJDAM
YVONNE ADEMA
Affiliation:
CPB Netherlands Bureau for Economic Policy Analysis, Den Haag, Netherlands (e-mail: y.adema@cpb.nl)
JAN BONENKAMP
Affiliation:
All Pensions Group (APG) and Netspar, Amsterdam, Netherlands
LEX MEIJDAM
Affiliation:
Department of Economics and CentER, Tilburg University, and Netspar, Tilburg, Netherlands
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Abstract

Retirement flexibility is often seen as a hedge against macroeconomic risks such as capital market risks, which justifies more risky asset portfolios. This paper analyses the robustness of this claim in both a partial equilibrium and general equilibrium setting. We show that this positive relationship between risk taking and retirement flexibility is weakened and under some conditions even turned around if not only capital market risks, but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk.

Keywords

E21G11J26Retirement (in)flexibilityportfolio choicegeneral equilibriumintratemporal substitution elasticity
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 17 , Issue 1 , January 2018 , pp. 1 - 22
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

*

We are grateful to Casper van Ewijk, Devis Geron, Jochen Mierau, Ward Romp and Ed Westerhout for their comments on earlier versions of this paper. We also wish to thank the participants of the Netspar pension workshop in Utrecht (November 10, 2010), the participants of the Netspar International Pension Workshop in Turin (June 16, 2011) and the participants of the Annual Congress of the International Institute of Public Finance in Ann Arbor, Michigan (August 8, 2011) for helpful comments and suggestions.

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