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Aggregate Risks, Intergenerational Risk-Sharing and Fiscal Sustainability in the Finnish Earnings-Related Pension System

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  • Lassila, Jukka

Abstract

We study how aggregate demographic and economic risks affect the finances of the Finnish earnings-related pension system and the different generations of the insured. As a partially funded defined-benefit system, demographic risks and asset yield risks directly affect the contributions. Our analysis, based on a general equilibrium overlapping-generations model, show that these risks also affect wages and thus pension benefits and replacement rates. Productivity growth also affects wages and thus both contributions and benefits. We also analyze quantitatively the use of pension funds with the aim of smoothing contributions over time and compare the outcomes of the current system to an alternative system with the same benefit rules but no funding. Smoothing is affected by the revisions in long-term forecasts and is thus imperfect. In addition, variation in asset yields often cause clashes with solvency limits. We find that funding results in more varying contributions over time than would be the case without funding. Concerning generational equity, young generations benefit from funding in the form of lower contributions and higher wages, and their consumption possibilities are further increased by the improved fiscal stance of the state and municipalities.

Suggested Citation

  • Lassila, Jukka, 2018. "Aggregate Risks, Intergenerational Risk-Sharing and Fiscal Sustainability in the Finnish Earnings-Related Pension System," ETLA Working Papers 57, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:wpaper:57
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    References listed on IDEAS

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    1. Auerbach, Alan & Kueng, Lorenz & Lee, Ronald & Yatsynovich, Yury, 2018. "Propagation and smoothing of shocks in alternative social security systems," Journal of Public Economics, Elsevier, vol. 164(C), pages 91-105.
    2. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 16-27, February.
    3. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-241, May.
    4. Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2014. "Demographic forecasts and fiscal policy rules," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1098-1109.
    5. Auerbach,Alan J. & Lee,Ronald D. (ed.), 2001. "Demographic Change and Fiscal Policy," Cambridge Books, Cambridge University Press, number 9780521662444.
    6. Jukka Lassila & Tarmo Valkonen, 2018. "Longevity, Working Lives, And Public Finances," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 467-482, July.
    7. Honkatukia, Juha, 2011. "Three takes on sustainability," Research Reports P58, VATT Institute for Economic Research.
    8. Alho, Juha M., 2014. "Forecasting demographic forecasts," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1128-1135.
    9. repec:zbw:bofism:2012_044 is not listed on IDEAS
    10. Jukka Lassila & Tarmo Valkonen & Juha M. Alho, 2011. "Assessing the sustainability of health and long-term care financing - and the usefulness of policy guidelines based on demographic forecasts," Chapters, in: Three takes sustainability. VATT Publications 58, pages 151-175, The Research Institute of the Finnish Economy.
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    Cited by:

    1. Hougaard Jensen, Svend E. & Lassila, Jukka & Määttänen, Niku & Valkonen, Tarmo & Westerhout, Ed, 2019. "Top 3: Pension Systems in Denmark, Finland, and the Netherlands," ETLA Working Papers 66, The Research Institute of the Finnish Economy.

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    More about this item

    Keywords

    Pensions; Funding; Contribution smoothing; Risks; Generational fairness;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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