Intergenerational Risk-Sharing Through Funded Pensions and Public Debt

Chen, Damiaan H.J.; Beetsma, Roel; Ponds, Eduard; Romp, Ward E.

doi:10.2139/ssrn.2400979

Cited by 4 publications

(2 citation statements)

References 28 publications

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“…First, risk sharing rules could be embedded in a collective pension system, for example, through indexation of the benets received and contributions paid based on the funding ratio of the pension plan (Cai et al, 2013;Gollier, 2008). Alternatively, they could be implemented through counter-cyclical adjustments in the tax code in combination with adjustments to the public debt, through the pay-asyou-go pension system, or by some combination of each of these (Chen et al, 2016). 7 As a benchmark risk-sharing case, we look at a planner solution, where the planner invests on behalf of the young and allocates consumption centrally between all young and old generations.…”

Section: Introductionmentioning

confidence: 99%

Intergenerational Risk Sharing with Market Liquidity Risk

Dimitrov

2022

SSRN Journal

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Section: Introductionmentioning

confidence: 99%

Intergenerational Risk Sharing with Market Liquidity Risk

Dimitrov

2022

SSRN Journal

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“…Some scholars have researched funded pension schemes from a risk-sharing perspective. For example, Chen et al (2014) link the funded scheme to debt and tax policy. Bonenkamp et al (2016) research pension reforms in different countries and how these reforms advance the participants' welfare in an aging environment.…”

Section: Introductionmentioning

confidence: 99%

Vague Pension Future: Empirical Evidence from the Israeli Radical Privatized Market

Wolf

Levi

2022

JRFM

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We examine the future benefits of the Israeli privatized pension system, which is considered as a model of transition to funded pension systems worldwide. This research is based on an extensive database obtained from one of the largest traditional private funds in the market. The results paint a concerning picture regarding the adequacy of benefits and quality of life in old age. Israel’s radical privatized pension model signals a warning to other nations. We show that, even with high returns, most individuals cannot handle the magnitude of financial and labor risks accumulated during their career and retirement. We recommend more balanced government intervention as well as the use of risk-sharing mechanisms such as providing minimum pension guarantee and strengthening the unfunded social security pillar.

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The transition to a multi-pillar pension system: the inherent socio-economic anomaly

Wolf

Ocerin

2021

JFEP

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Purpose This paper aims to analytically show that in an over-lapping-generation (OLG) model, low earning cohorts bear unwanted risk and absorb higher economic cost than high earning cohorts do. Design/methodology/approach This paper aims to consider the individual's risk appetite, using a simple utility function, based on consumptions and discount rates in each period. This paper calibrates the model according to teh Israeli pension system as a representative of a small open developed organization for economic cooperation and development country. Israel is considered as unique case study in the pension landscape, as it implements almost pure defined contribution pension scheme with continuous trend of pension market capitalization (Giorno and Jacques, 2016). Hence, this study finds Israel suitable for examining the theoretical mix of pension scheme. That model enables exploring combined solutions for adequate old age benefits, involving the first and the second pension pillars, under fiscal constraints. Findings It comes out that for risk-averse individuals, the optimal degree of funding is negatively correlated to asset returns' volatility and positively correlated to earning decile level. The neglect of risk and individual's current earning level will thus overstate the contribution level and funded percentage from total contributions. Moreover, even in an economy with minimum government intervention, and highly developed private pension fund with high average of rate of return, the authors find it is optimal that the pension system contains a sizeable unfunded pillar. This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. Practical implications The model presented in this paper could be implemented in countries with mix pension systems, as an alternative to public social transfers or means tested, alleviating poverty and inequality in old age. Additionally, this model could raise the public awareness of the financial sustainability of the unfunded pay-as-you-go pillar to diversify financial risk in pension systems, especially for low earning cohort in society. Social implications One area of research that is particularly relevant in this context concerns the issue of alleviating poverty and income inequality. It is often stressed that the prevention of old age poverty is among the central targets of well-designed pension system (Holzmann and Hinz, 2005). The conceptualization of minimum pension guarantee used in this composition allows to clearly capturing the notion of such a poverty and social targets as an integral part of the pension system rolls. Originality/value This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. That comes to realize through the level of total contribution rates and funded share that are generally optimal for high earning cohorts but not for low earning cohorts. This paper identifies that the effect of anomaly is most significant in a market characterized with high income-inequality level. This paper finds that imposing intra-generational risk sharing instrument in the form of minimum pension guarantee can re-balance pension design among different earning cohorts. This solution demonstrates balancing effect on the entire economy.

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Intergenerational Risk-Sharing Through Funded Pensions and Public Debt

Cited by 4 publications

References 28 publications

Intergenerational Risk Sharing with Market Liquidity Risk

Intergenerational Risk Sharing with Market Liquidity Risk

Vague Pension Future: Empirical Evidence from the Israeli Radical Privatized Market

The transition to a multi-pillar pension system: the inherent socio-economic anomaly

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