1 Introduction
Much of the industrialized world is undergoing a significant demographic shift, with
low birth rates and increasing longevity (see, e.g., United Nations, 2007). One
consequence of the aging population is an increasing strain on public pension
systems. Many such systems are pay-as-you-go plans, created under the expectation
that inflow would be generated from current workers whose number exceeds the
population of retirees. Today’s reality is a shrinking supply of workers relative to
retirees.1 As a result of these changing demographics, concern is rising over the
ability of government pay-as-you-go programs to remain viable.
Policymakers are responding with a variety of pension system reforms. The general
trend is to put more weight on funded, individually organized retirement systems.
Shifting the burden of old-age provision to individuals raises a central question: How
well are various population subgroups prepared to make financial decisions with
respect to their old-age provision? To answer this question, we use micro-level data
and investigate the performance of individual retirement wealth accumulation.
Within the wealth accumulation process, we focus on asset allocation.2 Taking the
existing government pension systems as given, we show the population subgroups
for which public policy should implement improvement measures.3
We further compare the performance of U.S. and German investors. This comparison
is especially valuable because of the institutional differences in the respective
retirement systems. The United States has a longer tradition for privately funded
retirement systems, because government pensions historically have been less
generous.4 Thus, we can investigate whether longer experience with individually
1 In the United States, for example, in 1950 the ratio of people aged 20 to 64 relative to
those over age 64 was 7.25. Today that ratio is 4.71, and by 2030, the ratio is estimated to
fall to 2.58 (U.S. Census Bureau, 2008). Comparable values for Germany are 6.25 in
1950, 3.13 for today, and an estimated 2.00 for 2030 (Federal Statistical Office, 2006).
2 Savings adequacy, the second major decision within the allocation process, is addressed
in Scholz, Seshadri, and Khitatrakun (2006).
3 To address the generally insufficient of knowledge among European Union citizens with
respect to the functioning of financial instruments necessary for old age, the Commission
of the European Union sees the necessity to improve that knowledge. See press release
IP/07/1954 on 12/18/2007: Financial services: Commission encourages better financial
education for EU citizens.
4 In 2004, 48% of retirement income for the population aged 65 and older was generated by
Social Security, railroad retirement, or government employee pensions (see Social