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Funded pensions and intergenerational and international risk sharing in general equilibrium

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  2. 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.
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  12. Torben Andersen, 2005. "Social Security and Longevity," CESifo Working Paper Series 1577, CESifo Group Munich.
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  14. De Jong, Frank, 2008. "Valuation of pension liabilities in incomplete markets," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(03), pages 277-294, November.
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