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Intergenerational risk-sharing through funded pensions and public debt*

Published online by Cambridge University Press:  02 December 2014

DAMIAAN H. J. CHEN ,
ROEL M. W. J. BEETSMA ,
EDUARD H. M. PONDS  and
WARD E. ROMP
DAMIAAN H. J. CHEN
Affiliation:
University of Amsterdam, MN and Tinbergen Institute†
ROEL M. W. J. BEETSMA
Affiliation:
MN Chair in Pension Economics, University of Amsterdam CEPR, CESifo, Netspar and Tinbergen Institute
EDUARD H. M. PONDS
Affiliation:
Tilburg University, APG and Netspar
WARD E. ROMP
Affiliation:
University of Amsterdam, Tinbergen Institute and Netspar (e-mail: w.e.romp@uva.nl)
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Abstract

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.

Keywords

G23H55H63Intergenerational risk-sharingpension fundspublic debtindexationcontributionstaxation regimessocial welfare
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 15 , Issue 2 , April 2016 , pp. 127 - 159
Copyright
Copyright © Cambridge University Press 2014 

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Footnotes

*

We thank two anonymous referees, Ed Westerhout and Nick Draper for helpful comments on earlier versions of this paper.

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