Funded pensions and international and intergenerational risk sharing in general equilibrium

R.M.W.J. Beetsma, A.L. Bovenberg, W.E. Romp

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We explore intergenerational and international risk sharing in a general equilibrium multiple-country model with two-tier pensions systems. The exact design of the pension system is key for the way in which risks are shared over generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks. However, the existence of wage-indexed bonds combined with a pension system with a fully funded second tier that pays defined wage-indexed benefits can reproduce the first best. If wage-indexed bonds are not available, mimicking the first best is not possible, except under special circumstances. We also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings. With wage-indexed bonds this incentive is absent, while there is indeed such an incentive when wage-indexed bonds do not exist.
Original languageEnglish
Pages (from-to)1516-1534
JournalJournal of International Money and Finance
Volume30
Issue number7
DOIs
Publication statusPublished - 2011

Fingerprint

General equilibrium
Wages
Intergenerational risk sharing
Pensions
International risk sharing
Pension system
Incentives
Equity
Optimal allocation
Pension funds
Laissez-faire
Financial risk

Cite this

@article{fc47cf7ab04c4855b2f3d53219ae06bb,
title = "Funded pensions and international and intergenerational risk sharing in general equilibrium",
abstract = "We explore intergenerational and international risk sharing in a general equilibrium multiple-country model with two-tier pensions systems. The exact design of the pension system is key for the way in which risks are shared over generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks. However, the existence of wage-indexed bonds combined with a pension system with a fully funded second tier that pays defined wage-indexed benefits can reproduce the first best. If wage-indexed bonds are not available, mimicking the first best is not possible, except under special circumstances. We also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings. With wage-indexed bonds this incentive is absent, while there is indeed such an incentive when wage-indexed bonds do not exist.",
author = "R.M.W.J. Beetsma and A.L. Bovenberg and W.E. Romp",
year = "2011",
doi = "10.1016/j.jimonfin.2011.07.001",
language = "English",
volume = "30",
pages = "1516--1534",
journal = "Journal of International Money and Finance",
issn = "0261-5606",
publisher = "ELSEVIER SCI LTD",
number = "7",

}

Funded pensions and international and intergenerational risk sharing in general equilibrium. / Beetsma, R.M.W.J.; Bovenberg, A.L.; Romp, W.E.

In: Journal of International Money and Finance, Vol. 30, No. 7, 2011, p. 1516-1534.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Funded pensions and international and intergenerational risk sharing in general equilibrium

AU - Beetsma, R.M.W.J.

AU - Bovenberg, A.L.

AU - Romp, W.E.

PY - 2011

Y1 - 2011

N2 - We explore intergenerational and international risk sharing in a general equilibrium multiple-country model with two-tier pensions systems. The exact design of the pension system is key for the way in which risks are shared over generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks. However, the existence of wage-indexed bonds combined with a pension system with a fully funded second tier that pays defined wage-indexed benefits can reproduce the first best. If wage-indexed bonds are not available, mimicking the first best is not possible, except under special circumstances. We also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings. With wage-indexed bonds this incentive is absent, while there is indeed such an incentive when wage-indexed bonds do not exist.

AB - We explore intergenerational and international risk sharing in a general equilibrium multiple-country model with two-tier pensions systems. The exact design of the pension system is key for the way in which risks are shared over generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks. However, the existence of wage-indexed bonds combined with a pension system with a fully funded second tier that pays defined wage-indexed benefits can reproduce the first best. If wage-indexed bonds are not available, mimicking the first best is not possible, except under special circumstances. We also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings. With wage-indexed bonds this incentive is absent, while there is indeed such an incentive when wage-indexed bonds do not exist.

U2 - 10.1016/j.jimonfin.2011.07.001

DO - 10.1016/j.jimonfin.2011.07.001

M3 - Article

VL - 30

SP - 1516

EP - 1534

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

IS - 7

ER -