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Intergenerational Risk Sharing in Time-Consistent Funded Pension Schemes

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  • Ed Westerhout

    () (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

Intergenerational risk sharing by funded pension schemes may increase welfare in an ex ante sense. However, it also suffers from a time inconsistency problem. In particular, young generations may be unwilling to start participating in a pension scheme if this requires them to make huge transfers to older generations. This paper explores if limiting the transfers between generations can make a funded pension scheme time-consistent. The paper finds that this is possible indeed in a more or less realistic economic environment; it is not the case in general however. The form of the time-consistent scheme (how strong are the limits to transfers) is found to be very responsive to the economic environment. The time-consistent scheme offers lower welfare than the original time-inconsistent scheme, but higher welfare than a defined-contribution scheme without any intergenerational risk sharing.

Suggested Citation

  • Ed Westerhout, 2011. "Intergenerational Risk Sharing in Time-Consistent Funded Pension Schemes," CPB Discussion Paper 176, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:discus:176
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    File URL: http://www.cpb.nl/sites/default/files/publicaties/download/dp176-intergenerational-risk-sharing-time-consistent-funded-pension-schemes.pdf
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    References listed on IDEAS

    as
    1. D'Amato, Marcello & Galasso, Vincenzo, 2010. "Political intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 628-637, October.
    2. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
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    Cited by:

    1. repec:eee:insuma:v:74:y:2017:i:c:p:20-30 is not listed on IDEAS
    2. repec:eee:insuma:v:74:y:2017:i:c:p:182-196 is not listed on IDEAS
    3. repec:eee:insuma:v:80:y:2018:i:c:p:1-14 is not listed on IDEAS
    4. Damiaan Chen & Roel Beetsma & Dirk Broeders, 2015. "Stability of participation in collective pension schemes: An option pricing approach," DNB Working Papers 484, Netherlands Central Bank, Research Department.
    5. Goecke, Oskar, 2013. "Pension saving schemes with return smoothing mechanism," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 678-689.
    6. Alserda, G.A.G. & Steenbeek, O.W. & van der Lecq, S.G., 2017. "The Occurrence and Impact of Pension Fund Discontinuity," ERIM Report Series Research in Management ERS-2017-008-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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