Abstract
Funded social security programs are particularly vulnerable to economic and financial market shocks. As a consequence of the recent crisis, a large fraction of the Dutch pension funds had to submit restoration plans for the recovery of their buffers. Such plans will have to rely primarily on a mix of reduced benefit indexation and increased pension contributions. Hence, a discussion has emerged whether indexation should be differentiated across the various groups of participants in a pension fund. We investigate this issue numerically, developing an applied many-generation small open-economy OLG model with heterogeneous agents. The pension system consists of a first-pillar PAYG component and a second pillar with a pension fund. In our stochastic simulations, we hit the economy with a variety of unexpected demographic, economic and financial shocks. We compare uniform indexation of pension rights across all fund participants with alternatives such as status-contingent indexation in which pensions are protected against price inflation. While the aggregate welfare consequences are small, group-specific consequences are more substantial with the workers and future born losing and retirees benefitting from a shift away from uniform indexation. The exception is a scheme which links indexation directly to the fund’s asset performance. Under this scheme the retired benefit without other groups losing. The welfare effects are primarily the result of systematic welfare redistributions rather than of shifts in the benefits of risk sharing. Contribution rates always have to rise substantially from their initial levels to maintain the system’s sustainability. An increase in the retirement age that leaves existing pension rights untouched does little to avoid this rise with its adverse labour market consequences.
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The authors thank two anonymous referees, Rob Alessie, Stefan Staubli and the participants of the 2009 CeRP conference on “Saving for Old Age in a Financial Turmoil” held in Turin and the 2009 WDA/Scala workshop on “Pension Challenges and the Financial Crisis”. Financial support from Netspar and Mn Services is gratefully acknowledged. The usual disclaimers apply.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Beetsma, R.M.W.J., Bucciol, A. Differentiating Indexation in Dutch Pension Funds. De Economist 159, 323–360 (2011). https://doi.org/10.1007/s10645-011-9170-9
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DOI: https://doi.org/10.1007/s10645-011-9170-9