Funded pensions and intergenerational and international risk sharing in general equilibrium

Roel Beetsma, Lans Bovenberg and Ward Romp

Journal of International Money and Finance, 2011, vol. 30, issue 7, 1516-1534

Abstract: We explore intergenerational and international risk sharing in a general equilibrium multiple-country model with two-tier pensions systems. The exact design of the pension system is key for the way in which risks are shared over generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks. However, the existence of wage-indexed bonds combined with a pension system with a fully funded second tier that pays defined wage-indexed benefits can reproduce the first best. If wage-indexed bonds are not available, mimicking the first best is not possible, except under special circumstances. We also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings. With wage-indexed bonds this incentive is absent, while there is indeed such an incentive when wage-indexed bonds do not exist.

Keywords: Funded pensions; Risk sharing; Overlapping generations; Defined wage-indexed benefits; Wage-indexed bonds (search for similar items in EconPapers)
JEL-codes: E2 F4 G2 H6 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Funded Pensions and Intergenerational and International Risk Sharing in General Equilibrium (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:7:p:1516-1534

DOI: 10.1016/j.jimonfin.2011.07.001

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