Pension Fund Restoration Policy In General Equilibrium

Pim Kastelein and Ward E. Romp ()
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Ward E. Romp: University of Amsterdam, Netspar

No 18-053/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate real or nominal benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution) or changing the pension fund contribution rate on labour income (Defined Benefit). Generally, economies with Defined Contribution pension funds respond similarly to adverse capital quality shocks as economies without pension funds. Defined Benefit pension funds, however, distort labour supply decisions and exacerbate economic fluctuations. Retirees prefer Defined Benefit over Defined Contribution funds in case they face deficits, while the current and future working population prefers the opposite.

Keywords: Pension Fund; Regulation; Business Cycles; Life cycle; New-Keynesian model (search for similar items in EconPapers)
JEL-codes: D91 E21 E32 J32 (search for similar items in EconPapers)
Date: 2018-05-25, Revised 2018-07-06
New Economics Papers: this item is included in nep-age, nep-dge and nep-mac
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Related works:
Journal Article: PENSION FUND RESTORATION POLICY IN GENERAL EQUILIBRIUM (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20180053

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