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Funded pensions and intergenerational and international risk sharing in general equilibrium

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  • Beetsma, Roel M.W.J.
  • Bovenberg, A. Lans
  • Romp, Ward E.

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 7 ()
Pages: 1516-1534

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:7:p:1516-1534

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Funded pensions; Risk sharing; Overlapping generations; Defined wage-indexed benefits; Wage-indexed bonds;

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  1. Frank de Jong, 2005. "Valuation of pension liabilities in incomplete markets," DNB Working Papers 067, Netherlands Central Bank, Research Department.
  2. Matsen, Egil & Thogersen, Oystein, 2004. "Designing social security - a portfolio choice approach," European Economic Review, Elsevier, vol. 48(4), pages 883-904, August.
  3. John Y. Campbell & Yves Nosbusch, 2007. "Intergenerational Risksharing and Equilibrium Asset Prices," FMG Discussion Papers dp589, Financial Markets Group.
  4. Henning Bohn, 2004. "Intergenerational Risk Sharing and Fiscal Policy," 2004 Meeting Papers 22, Society for Economic Dynamics.
  5. Robert J. Shiller, 1998. "Social Security and Institutions for Intergenerational, Intragenerational, and International Risk Sharing," JCPR Working Papers 43, Northwestern University/University of Chicago Joint Center for Poverty Research.
  6. de Vries, Casper G & Teulings, Coen N, 2004. "Generational Accounting, Solidarity and Pension Losses," CEPR Discussion Papers 4209, C.E.P.R. Discussion Papers.
  7. Roel M. W. J. Beetsma & A. Lans Bovenberg, 2009. "Pensions and Intergenerational Risk-sharing in General Equilibrium," Economica, London School of Economics and Political Science, vol. 76(302), pages 364-386, 04.
  8. Dirk Krueger & Felix Kubler, 2002. "Intergenerational Risk-Sharing via Social Security when Financial Markets Are Incomplete," American Economic Review, American Economic Association, vol. 92(2), pages 407-410, May.
  9. Roel Beetsma & Ward E. Romp & Siert J. Vos, 2008. "Intergenerational Risk Sharing, Pensions and Endogenous Labor Supply in General Equilibrium," CESifo Working Paper Series 2185, CESifo Group Munich.
  10. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  11. Smetters, Kent, 2006. "Risk sharing across generations without publicly owned equities," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1493-1508, October.
  12. Laurence Ball & N. Gregory Mankiw, 2007. "Intergenerational Risk Sharing in the Spirit of Arrow, Debreu, and Rawls, with Applications to Social Security Design," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 523-547, 08.
  13. Wagener, Andreas, 2004. "On intergenerational risk sharing within social security schemes," European Journal of Political Economy, Elsevier, vol. 20(1), pages 181-206, March.
  14. Torben Andersen, 2005. "Social Security and Longevity," CESifo Working Paper Series 1577, CESifo Group Munich.
  15. Alan J. Auerbach & Kevin A. Hassett, 2002. "Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty," NBER Working Papers 9132, National Bureau of Economic Research, Inc.
  16. David Miles & Ales Cerny, 2006. "Risk, Return and Portfolio Allocation under Alternative Pension Systems with Incomplete and Imperfect Financial Markets," Economic Journal, Royal Economic Society, vol. 116(511), pages 529-557, 04.
  17. repec:fth:iniesr:493 is not listed on IDEAS
  18. Oksanen, Heikki, 2006. "Actuarial Neutrality across Generations Applied to Public Pensions under Population Ageing: Effects on Government Finances and National Saving," Discussion Paper 284, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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