Pensionomics puts forward a portfolio perspective on the combination of funded and unfunded
pension arrangements. In a second-best type argument it is formally shown that a Pay-As-You-Go
pension system can substitute the tradability of human capital: if risk-averse investors were
able to directly invest into the present value of future labour income they would allocate
their pension portfolios in both human and physical capital. While this ideal form of
diversification can not be implemented due to the imperfection of capital markets one can
design a typical Pay-As-You-Go system in such a way that it allows for the same intertemporal
consumption allocations as the first-best solution. This replication works regardless of the
demographic development.Therefore PAYGO should play a key role in optimising the risk-return
combinations for old-age savings.
