Intergenerational Risk Sharing in Time-Consistent Funded Pension Schemes

Ed Westerhout ()
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Ed Westerhout: CPB Netherlands Bureau for Economic Policy Analysis

No 176, CPB Discussion Paper from 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.

JEL-codes: H55 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-age and nep-dge
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Citations: View citations in EconPapers (10)

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