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Participation Constraints in Pension Systems

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  • Roel Beetsma

    (University of Amsterdam)

  • Ward Romp

    (University of Amsterdam)

Abstract

We explore voluntary participation in pension arrangements. Individuals only participate when participation is more attractive than autarky. The bene􀏐it of participation is that risks can be shared with future generations. We apply our analysis to a pay-as-you-go system, a funded system without buffers and a funded system with buffers. Buffers play a particularly interesting role, because they raise the sensitivity of the contributions to the asset returns. In particular, compared to a system without buffer requirements, they require higher contributions when asset returns are low. Moreover, individual contributions may be increasing or decreasing in the size of the young cohort, depending on whether the fund has more or less reserves than required. We con􀏐ine ourselves to recursive settings and study equilibria characterised by thresholds on the contribution that young generations are prepared to make assuming that the future young apply the same threshold. For standard parameter settings two such equilibria exist, of which only the one with the higher threshold is consistent with the initial young being prepared to start the system. Finally, we explore the social welfare maximising policy parameter settings for various levels of uncertainty and risk aversion.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-149/VI.

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Date of creation: 23 Sep 2013
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Handle: RePEc:dgr:uvatin:20130149

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Web page: http://www.tinbergen.nl

Related research

Keywords: Participation constraints; pension funds; pay-as-you-go; buffers; risk-sharing;

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References

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  1. Ball, Laurence & Mankiw, N. Gregory, 2007. "Intergenerational Risk Sharing in the Spirit of Arrow, Debreu, and Rawls, with Applications to Social Security Design," Scholarly Articles 3443106, Harvard University Department of Economics.
  2. Gollier, Christian, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 42, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. John Geanakoplos & Michael Magill & Martine Quinzii, 2002. "Demography and the Long-run Predictability of the Stock Market," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1380R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2004.
  4. Matsen, Egil & Thogersen, Oystein, 2004. "Designing social security - a portfolio choice approach," European Economic Review, Elsevier, Elsevier, vol. 48(4), pages 883-904, August.
  5. Hassler, John & Lindbeck, Assar, 1997. "Intergenerational Risk Sharing, Stability and Optimality of Alternative Pension Systems," Working Paper Series, Research Institute of Industrial Economics 493, Research Institute of Industrial Economics.
  6. Andreas Wagener, 2001. "On Intergenerational Risk Sharing within Social Security Schemes," CESifo Working Paper Series 499, CESifo Group Munich.
  7. Sanchez-Marcos, Virginia & Sanchez-Martin, Alfonso R., 2006. "Can social security be welfare improving when there is demographic uncertainty?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(9-10), pages 1615-1646.
  8. Dirk Krueger & Felix Kubler, 2003. "Pareto Improving Social Security Reform when Financial Markets are Incomplete?," NBER Working Papers 9410, National Bureau of Economic Research, Inc.
  9. Gabrielle Demange & Guy Laroque, 2001. "Social Security with Heterogeneous Populations Subject to Demographic Shocks," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 26(1), pages 5-24, June.
  10. Campbell, John Y. & Chan, Yeung Lewis & Viceira, Luis M., 2003. "A multivariate model of strategic asset allocation," Journal of Financial Economics, Elsevier, Elsevier, vol. 67(1), pages 41-80, January.
  11. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
  12. ûystein ThÛgersen, 1998. "A note on intergenerational risk sharing and the design of pay-as-you-go pension programs," Journal of Population Economics, Springer, Springer, vol. 11(3), pages 373-378.
  13. Edward C. Prescott & José-Víctor Ríos-Rull, 2005. "On Equilibrium For Overlapping Generations Organizations ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1065-1080, November.
  14. 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, London School of Economics and Political Science, vol. 76(302), pages 364-386, 04.
  15. Cui, Jiajia & Jong, Frank De & Ponds, Eduard, 2011. "Intergenerational risk sharing within funded pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 10(01), pages 1-29, January.
  16. repec:fth:iniesr:493 is not listed on IDEAS
  17. Beetsma, Roel & Romp, Ward E & Vos, Siert-Jan, 2011. "Voluntary participation and intergenerational risk sharing in a funded pension system," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8312, C.E.P.R. Discussion Papers.
  18. Olovsson, Conny, 2010. "Quantifying the risk-sharing welfare gains of social security," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(3), pages 364-375, April.
  19. Roel M. W. J. Beetsma & Ward E. Romp & Siert J. Vos, 2013. "Intergenerational Risk Sharing, Pensions, and Endogenous Labour Supply in General Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 115(1), pages 141-154, 01.
  20. Gabrielle Demange, 2009. "On Sustainable Pay-as-You-Go Contribution Rules," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 11(4), pages 493-527, 08.
  21. Enders, Walter & Lapan, Harvey E., 1982. "Social Security Taxation and Inter-Generational Risk Sharing," Staff General Research Papers, Iowa State University, Department of Economics 10822, Iowa State University, Department of Economics.
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Cited by:
  1. Damiaan H.J. Chen & Roel Beetsma, 2014. "Mandatory Participation in Occupational Pension Schemes in the Netherlands and other Countries," CESifo Working Paper Series 4593, CESifo Group Munich.
  2. Damiaan H.J. Chen & Roel Beetsma & Eduard Ponds & Ward E. Romp, 2014. "Intergenerational Risk-Sharing through Funded Pensions and Public Debt," CESifo Working Paper Series 4624, CESifo Group Munich.

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