Intergenerational risk-sharing through funded pensions and public debt

We explore the benefits of intergenerational risk-sharing through both private funded pensions and via the public debt. We use a multi-period overlapping generation model with a pay-as-you-go pension pillar, a funded pension pillar and a government. Shocks are smoothed via the public debt and variat...

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Bibliographic Details
Published in:Journal of pension economics & finance 2016-04, Vol.15 (2), p.127-159
Main Authors: CHEN, DAMIAAN H. J., BEETSMA, ROEL M. W. J., PONDS, EDUARD H. M., ROMP, WARD E.
Format: Article
Language:English
Subjects:
Annuities
Deficit financing
Economic models
Economic statistics
Economic theory
Funding
Pension funds
Retirement
Risk
Risk sharing
Studies
Tax rates
Taxation
Taxes
Volatility
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Summary:We explore the benefits of intergenerational risk-sharing through both private funded pensions and via the public debt. We use a multi-period overlapping generation model with a pay-as-you-go pension pillar, a funded pension pillar and a government. Shocks are smoothed via the public debt and variations in the indexation of pension entitlements and pension contributions. The intensity of these adjustments increases when the pension funding ratio or public debt gets closer to their boundaries. The best-performing pension arrangement is a hybrid funded scheme in which both contributions and entitlement indexation are simultaneously deployed as stabilisation instruments. We find that contribution and indexation adjustment policies are substitutes and the same is the case for contribution and tax adjustment policies. By contrast, indexation and tax adjustment policies are complements. We compare different taxation regimes and conclude that a regime in which pension benefits are taxed, while contributions are paid before taxes, is preferred to a regime in which contributions are paid after taxes, but benefits are untaxed.
ISSN:1474-7472
1475-3022
DOI:10.1017/S1474747214000365