Risk pooling

Saving for retirement

The biggest question facing anyone considering retirement is financial: are my savings sufficient to provide for my lifestyle for the rest of my life? For the fortunate among us, the answer is yes. But for a large fraction of the population, the answer is likely no.

The typical U.S. household has few retirement savings. The National Institute on Retirement Security reports that the median for near-retirement households is $12,000, while that for all households is only $3,000. Most people are relying on government social security to meet their retirement needs.

There are many reasons for this. One is the reduction in the fraction of employers offering any retirement plan at all, and another is the shift away from defined-benefit (DB) and toward defined-contribution (DC) pension plans. The result is that many individuals face risks that they are not equipped to bear, and many households need to save substantially more than they would have had these changes not occurred....

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Financial Innovation and Risk Management

In 2013, Robert Shiller shared the Nobel Prize for Economics with Eugene Fama and Lars Peter Hansen for their research on asset pricing. While Shiller is known as a critic of the efficient markets hypothesis and as a proponent of behavioral finance, less appreciated is his work on advancing financial technology to help societies manage fundamental economic risks.

At a time when the recent crisis has given financial innovation a bad name, Shiller’s contrarian message is that well-designed financial instruments and markets are an enormous boon to social welfare. We agree.

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Do U.S. Households Benefit from the Great Moderation?

Something odd has happened to the U.S. economy over the past 30 years. Aggregate income (measured by real GDP) has become more stable (even including the 2007-2009 Great Recession). But, at the household level, the volatility of income has gone up. Put differently, families face greater income risk than in the past despite generally fewer or smaller economy-wide wobbles. What should we make of this?

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