Working Paper: CEPR ID: DP6089
Authors: Roel Beetsma; A. Lans Bovenberg
Abstract: We investigate intergenerational risk sharing in two-pillar pension systems with a pay-as-you-go pillar and a funded pillar. We consider shocks in productivity, depreciation of capital and inflation. The funded pension pillar can be either defined contribution or defined benefit, with benefits defined in real or nominal terms or indexed to wages. Optimal intergenerational risk sharing can be achieved only in the presence of a defined benefit pension system with appropriate restrictions on investment policy of the funded pillar. In this way, both generations have similar exposures to financial and human capital risks.
Keywords: Funded Pensions; Fiscal Policy; Nominal Assets; Overlapping Generations; Risk Sharing
JEL Codes: E21; H55; J18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| a combination of a pay-as-you-go pension system and a funded defined benefit pension fund (H55) | intergenerational risk sharing (D15) |
| defined benefit pension system (H55) | young generation shares financial risks (G51) |
| pension benefits linked to wages (J32) | better risk sharing (G52) |
| similar exposures to depreciation and productivity risks (D25) | optimal intergenerational risk sharing (D15) |
| defined benefit systems defined in nominal terms (H55) | old generation's exposure to inflation risk (D15) |
| systems defined in real terms or indexed to wages (J31) | old generation's exposure to inflation risk (D15) |