Procyclicality of Pension Fund Regulation and Behaviour

Romp

2018

SSRN Journal

Self Cite

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.JEL classification: J32, E32, D91, E21

Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

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Pension Fund Restoration Policy in General Equilibrium

Romp

2018

SSRN Journal

Self Cite

“…Furthermore, the flow utility function of agents is augmented to be of the 'money-in-the-utility-function'-type. As a novelty, we embed the pension fund framework of Romp (2013) into our model. This framework can flexibly mimick various types of pension funds observed in reality, depending on the specific parametrisation.…”

Section: Introductionmentioning

confidence: 99%

“…On the one hand, we extend the literature on Gertler (1999) models such that a wider variety of pension arrangements can be studied. 2 On the other hand, we significantly enrich the demand-side of Romp (2013) in which the optimisation problems of workers and retirees is highly stylised.…”

Section: Introductionmentioning

confidence: 99%

Pension Fund Restoration Policy in General Equilibrium

2016

SSRN Journal

This paper quantifies the business cycle effects and distributional implications of pension fund restoration policy after the economy has been hit by a financial shock. We extend a canonical New-Keynesian dynamic general equilibrium model with a tractable demographic structure and a pension fund. Numerical simulations show that economies with pension funds that primarily write off accumulated pension wealth to restore financial adequacy behave similarly to an economy without a pension fund. Significant deviations from laissez-faire arise when the pension fund increases the pension fund contribution rate to close the funding gap or postpones the closure of the funding gap. At a cost of significantly distorting aggregate labour supply and output, the pension fund can shelter the group of retirees from unanticipated shocks by guaranteeing the value of their accumulated pension wealth. A defined benefit pension fund can be welfare improving to the group of agents that is already born in the period the financial shock hits. However, since pension funding gaps are typically closed over an extended period of time, a part of the welfare gains to currently alive agents comes at the expense of future, currently unborn, generations.JEL classification: J32, E32, D91, E21

Pension Fund Restoration Policy in General Equilibrium

Romp

2019

Macroecon. Dynam.

Self Cite

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 inflation-indexed or non-indexed benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution (DC)) or changing the pension fund contribution rate on labor income (Defined Benefit (DB)). Economies with DC pension funds respond similarly to adverse capital quality shocks as economies without pension funds. DB pension funds, however, distort labor supply decisions and exacerbate economic fluctuations. While DB pension funds achieve intergenerational risk-sharing, welfare analyses indicate that the negative effects of the induced distortions are sizeable.