Risk Pooling and the Market Crash: Lessons From Canada’s Pension Plan
The brief’s key findings are:
- In the United States, workers hold equities in their 401(k)s, fully exposing them to a stock market crash.
- Canada’s Pension Plan (CPP) offers an alternative approach –it pools equity risk, dampening the effects on individual households.
- The CPP responds to a market crash by prompting policymakers to modestly adjust taxes and/or benefits.
- With a very long-term horizon, the CPP can also respond to a market decline by buying assets at low prices, which helps stabilize the financial market.