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Pension Prefunding, Ageing, and Demographic Uncertainty

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  • Jukka Lassila

  • Tarmo Valkonen

Abstract

Pension prefunding can be used to smooth contribution rates in economies where ageing will increase pension expenditure. But how extensive should prefunding be in a defined benefit pension system when there is considerable uncertainty concerning future mortality, fertility, and migration? We study the prefunding rules in the Finnish earnings-related pension system with an OLG simulation model. The results show that increasing the degree of prefunding could yield a more even intergenerational outcome and make future generations' position better, but it is quite possible to overshoot and harm current generations too much. Making the degree of prefunding fertility-dependent appears to be a useful alternative. With declining fertility, current large cohorts would pay modestly increased contributions. The accumulated funds, however, will be huge in relation to the wage bills of smaller future cohorts. Copyright Kluwer Academic Publishers 2001

Suggested Citation

  • Jukka Lassila & Tarmo Valkonen, 2001. "Pension Prefunding, Ageing, and Demographic Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 573-593, August.
    • Handle: RePEc:kap:itaxpf:v:8:y:2001:i:4:p:573-593
    DOI: 10.1023/A:1011276620950
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    1. Jukka Lassila, 2000. "Wage formation by majority voting and the incentive effects of pensions and taxation," Finnish Economic Papers, Finnish Economic Association, vol. 13(2), pages 89-115, Autumn.
    2. Palacios,Robert J. & Pallares-Miralles,Montserrat, 2000. "International patterns of pension provision," The Social Policy and Labor Discussion Paper Series 98252, The World Bank.
    3. Valkonen, Tarmo, . "The Finnish Corporate and Capital Income Tax Reform: A General Equilibrium Approach," ETLA A, The Research Institute of the Finnish Economy, number 29, June.
    4. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324, Elsevier.
    5. Sinn, Hans-Werner, 2004. "The pay-as-you-go pension system as fertility insurance and an enforcement device," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1335-1357, July.
    6. Bohn, Henning, 1999. "Will social security and Medicare remain viable as the U.S. population is aging?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 1-53, June.
    7. Jukka Lassila & Tarmo Valkonen, 2002. "Prefunding in a Defined Benefit Pension System: The Finnish Case," NBER Chapters, in: Social Security Pension Reform in Europe, pages 263-290, National Bureau of Economic Research, Inc.
    8. repec:wbk:wbrwps:98252 is not listed on IDEAS
    9. Disney, Richard, 1999. "Notional accounts as a pension reform strategy : an evaluation," The Social Policy and Labor Discussion Paper Series 21302, The World Bank.
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    Cited by:

    1. Fehr, Hans & Habermann, Christian, 2006. "Pension reform and demographic uncertainty: the case of Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(1), pages 69-90, March.
    2. Lassila, Jukka & Valkonen, Tarmo, 2001. "Ageing, Demographic Risks, and Pension Reform," Discussion Papers 765, The Research Institute of the Finnish Economy.
    3. Heikki Oksanen, 2001. "A Case for Partial Funding of Pensions with an Application to the EU Candidate Countries," CESifo Working Paper Series 466, CESifo.
    4. Valkonen, Tarmo, 2002. "Demographic Uncertainty and Taxes," Discussion Papers 816, The Research Institute of the Finnish Economy.
    5. Lucas Bretschger & Karen Pittel, 2005. "Innovative Investments, Natural Resources and Intergenerational Fairness: Are Pension Funds Good for Sustainable Development?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(3), pages 355-376, September.
    6. Alho, Juha M. & Vanne, Reijo, 2006. "On predictive distributions of public net liabilities," International Journal of Forecasting, Elsevier, vol. 22(4), pages 725-733.
    7. Nick Draper & Alex Armstrong, 2007. "GAMMA; a simulation model for ageing, pensions and public finances," CPB Document 147, CPB Netherlands Bureau for Economic Policy Analysis.

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