Funded Pensions and Intergenerational and International Risk Sharing in General Equilibrium

Roel Beetsma, Lans Bovenberg and Ward Romp

No 7106, CEPR Discussion Papers from Centre for Economic Policy Research

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 funded tier is key for the way in which risks are shared over the various generations. The laissez-faire market solution fails to provide an optimal allocation because the young cannot share in the 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 F42 G23 H55 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-dge, nep-lab and nep-opm
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Journal Article: Funded pensions and intergenerational and international risk sharing in general equilibrium (2011)
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