J. Bonenkamp

Intergenerational Risk Sharing and Labour Supply in Collective Funded Pension Schemes with Defined Benefits

Collective funded pension schemes with defined benefits (DB) raise welfare through intergenerational risk sharing, but may lower welfare through distortion of the labour-leisure decision. This paper compares the welfare gains with the welfare losses. In many countries, collective funded pension schemes with defined benefits (DB) are being replaced by individual schemes with defined contributions. Collective funded DB pensions may indeed reduce social welfare when the schemes feature income-related contributions that distort the labour-leisure decision. However, these schemes also share risks between generations and add to welfare if these risks cannot be traded on capital markets. Do the gains outweigh the losses? For answering this question, we adopt a two-period overlapping-generations model for a small open economy with risky returns to equity holdings. We derive analytically that the gains dominate the losses for the case of Cobb-Douglas preferences between labour and leisure. Numerical simulations for the more general CES case confirm these findings, which also withstand a number of other model modifications (like the introduction of a short-sale constraint for households and the inclusion of a labour income tax). These results suggest that collective funded schemes with well-organized risk sharing are preferable over individual schemes, even if labour market distortions are taken into account.

Collective versus Individual Pension Schemes: a Welfare-Theoretical Perspective

This paper explores the welfare effects of a number of collective pension contracts, distinguishing between the two welfare effects. We find that collective schemes can be either superior or inferior to individual schemes. Collective pension contracts allow for intergenerational risk sharing with the unborn. They therefore imply a higher level of social welfare than individual accounts. Collective pension contracts also imply a sub- optimal allocation of consumption across time periods and states of nature however. Hence, collective pension contracts also reduce social welfare. This paper explores the welfare effects of a number of collective pension contracts, distinguishing between the two welfare effects. We find that collective schemes can be either superior or inferior to individual schemes.

Retirement Flexibility and Portfolio Choice

This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model. We analyse this interaction both in a partial-equilibrium and general-equilibrium setting. Retirement flexibility is often seen as a hedge against capital-market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement fl exibility is weakened - and under some conditions even turned around - if not only capital-market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general-equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.

Report on the Effect of the Credit Crisis on the Solvency of Dutch Pension Funds and its Economic Consequences

The credit crisis has reduced the funding ratios of Dutch pension funds to a historical minimum. Pension funds now face two challenges. The first is to timely restore funding ratios to safe levels without jeopardizing labour market conditions that also have worsened because of the crisis. The second is to reform schemes such that they are less vulnerable to aggregate shocks in the coming decades in which population aging is expected to accelerate.