Intergenerational Risk-Sharing Through Funded Pensions and Public Debt

39 Pages Posted: 25 Feb 2014

See all articles by Damiaan Chen

Damiaan Chen

University of Amsterdam

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Ward E. Romp

University of Amsterdam - Faculty of Economics and Business

Date Written: February 25, 2014

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 generations model with a PAYG 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 the pension contribution rate, which both respond to funding ratio of the pension fund. The intensity of these adjustments increases when the funding ratio or the public debt ratio get closer to their boundaries. The best-performing pension arrangement is a hybrid funded scheme in which both contributions and entitlement indexation are deployed as stabilization instruments. We find trade-offs between the optimal use of these instruments. We also find that entitlement indexation and the response of the tax rate to public debt movements 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, while benefits are untaxed.

Keywords: intergenerational risk-sharing, pension funds, public debt, EET and TEE tax regimes, welfare

JEL Classification: G230, H550, H630

Suggested Citation

Chen, Damiaan and Beetsma, Roel M. W. J. and Ponds, Eduard H.M. and Romp, Ward E., Intergenerational Risk-Sharing Through Funded Pensions and Public Debt (February 25, 2014). Available at SSRN: https://ssrn.com/abstract=2400979 or http://dx.doi.org/10.2139/ssrn.2400979

Damiaan Chen (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

P.O.Box 15867
Amsterdam
Netherlands
+31 20 525 5280 (Phone)

European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Eduard H.M. Ponds

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

Ward E. Romp

University of Amsterdam - Faculty of Economics and Business ( email )

Roeterstraat 11
1018 WB
Amsterdam
Netherlands

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