Defined Benefit Pension Schemes: A Welfare Analysis of Risk Sharing and Labour Market Distortions

Nick Draper, Ed Westerhout () and André Nibbelink ()
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Ed Westerhout: CPB Netherlands Bureau for Economic Policy Analysis
André Nibbelink: CPB Netherlands Bureau for Economic Policy Analysis

No 177, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: This CPB Discussion Paper addresses two policy questions with respect to public defined benefit (DB) pension schemes. Firstly, does a funded DB pension scheme increase welfare? Secondly, how large is the commitment problem of pension funds after an adverse capital market shock? This CPB Discussion Paper addresses two policy questions with respect to public defined benefit (DB) pension schemes: Firstly, does a funded DB pension scheme increase welfare? In other words: do the gains from intergenerational sharing of capital market risks outweigh the labour market distortions from pension schemes? Secondly, how large is the commitment problem of pension funds after an adverse capital market shock? The answer to the first question depends on the used welfare measure. If we use risk-neutral weights to aggregate the equivalent variations of different generations in different states of nature then a DB pension scheme is welfare increasing. If we use as weights the stochastic discount factors that corresponds to these states of nature, we conclude the opposite: a DB pension scheme reduces welfare. The probability that future households actually experience a welfare gain if the pension scheme is closed can be as large as 38 percent. So, a pure DB pension scheme has a large commitment problem: continuity will become at risk in case participation in the pension scheme is not mandatory. These results are most sensitive for the values of the labour supply elasticity, the risk aversion parameter and the mean and the standard deviation of the excess return on equity.

JEL-codes: D61 H55 (search for similar items in EconPapers)
Date: 2011-04
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Citations: View citations in EconPapers (3)

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Journal Article: Defined benefit pension schemes: a welfare analysis of risk sharing and labour market distortions* (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cpb:discus:177

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