Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-26T03:41:16.798Z Has data issue: false hasContentIssue false
  • English
  • Français

PENSION FUND RESTORATION POLICY IN GENERAL EQUILIBRIUM

Published online by Cambridge University Press:  16 December 2019

Pim B. Kastelein  and
Ward E. Romp
Pim B. Kastelein*
Affiliation:
University of Amsterdam
Ward E. Romp
Affiliation:
University of Amsterdam
*
Address correspondence to: Pim B. Kastelein, Amsterdam School of Economics, University of Amsterdam, Roeterstraat 11 E3.24, 1012 WX Amsterdam, The Netherlands. e-mail: [email protected].
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

Keywords

Pension fundRegulationNew-Keynesian modelIntergenerational risk-sharing
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 7 , October 2020 , pp. 1785 - 1814
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2019

Footnotes

This work is part of the research project “Pension funding, housing wealth and macroeconomic demand” with project number 406.16.530, which is partly financed by the Netherlands Organization for Scientific Research (NWO).

References

Beetsma, R. M. W. J. and Bovenberg, A. L. (2009) Pensions and intergenerational risk-sharing in general equilibrium. Economica 76, 364–386.CrossRefGoogle Scholar
Beetsma, R. M. W. J. and Romp, W. E. (2016) Intergenerational risk sharing. In: Piggott, J. and Woodland, A. (eds.), Handbook of the Economics of Population Aging, pp. 311–380. Amsterdam: North-Holland.Google Scholar
Beetsma, R. M. W. J., Romp, W. E. and Vos, S. J. (2013) Intergenerational risk sharing, pensions, and endogenous labour supply in general equilibrium. The Scandinavian Journal of Economics 115, 141–154.CrossRefGoogle Scholar
Blanchard, O. J. (1985) Debt, deficits, and finite horizons. Journal of Political Economy 93, 223–247.CrossRefGoogle Scholar
Bonenkamp, J. and Westerhout, E. (2014) Intergenerational risk sharing and endogenous labour supply within funded pension schemes. Economica 81, 566–592.CrossRefGoogle Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383–398.CrossRefGoogle Scholar
Chen, D. H. J. and van Wijnbergen, S. J. G. (2017) Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds. Tinbergen Institute Discussion Paper 2017-114/VI.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
de Haan, L. (2015) Recovery Measures of Underfunded Pension Funds: Higher Contributions, No Indexation, or Pension Cuts? DNB Working Paper 485.CrossRefGoogle Scholar
Draper, N., Westerhout, E. and Nibbelink, A. (2017) Defined benefit pension schemes: A welfare analysis of risk sharing and labour market distortions. Journal of Pension Economics and Finance 16, 467–484.CrossRefGoogle Scholar
Farmer, R. E. A. (1990) RINCE preferences. The Quarterly Journal of Economics 105, 43–60.CrossRefGoogle Scholar
Fernández-Villaverde, J. and Rubio-Ramírez, J. F. (2006). A baseline DSGE model. Mimeo. Available at http://economics.sas.upenn.edu/jesusfv/benchmark_DSGE.pdf.Google Scholar
Gertler, M. (1999) Government debt and social security in a life-cycle economy. Carnegie Rochester Conference Series on Public Policy, 61–110.CrossRefGoogle Scholar
Gertler, M. and Karadi, P. (2011) A model of unconventional monetary policy. Journal of Monetary Economics 58, 17–34.CrossRefGoogle Scholar
Gollier, C. (2008) Intergenerational risk-sharing and risk-taking of a pension fund. Journal of Public Economics 92, 1463–1485.CrossRefGoogle Scholar
Harrison, G. W., Lau, M. I. and Williams, M. B. (2002) Estimating individual discount rates in Denmark: A field experiment. American Economic Review 92, 1606–1617.CrossRefGoogle Scholar
Kara, E. and von Thadden, L. (2016) Interest rate effects of demographic change in a New-Keynesian life-cycle framework. Macroeconomic Dynamics 20, 120–164.CrossRefGoogle Scholar
Laboul, A. (2010) Pension fund assets struggle to return to pre-crisis levels. OECD Pension Markets in Focus 7, 1–20.Google Scholar
Novy-Marx, R. and Rauh, J. (2011) Public pension promises: How big are they and what are they worth? The Journal of Finance 66, 1211–1249.CrossRefGoogle Scholar
OECD (2017) Pension Markets in Focus 2017. OECD Publishing. Available at http://www.oecd.org/pensions/private-pensions/Pension-Markets-in-Focus-2017.pdf.Google Scholar
Romp, W. E. (2013) Procyclicality of Pension Fund Regulation and Behaviour. Netspar Discussion Paper 11/2013.CrossRefGoogle Scholar
Treasury (2012) The Financial Crisis Response in Charts. Available at https://www.treasury.gov/resource-center/data-chart-center/Documents/20120413_FinancialCrisisResponse.pdf.Google Scholar
van Bommel, J. and Penalva, J. (2012) The Governance of Perpetual Financial Intermediaries. LSF Research Working Paper Series 12–10.Google Scholar
Supplementary material: PDF

Kastelein and Romp supplementary material

Appendix
Download Kastelein and Romp supplementary material(PDF)
PDF 364 KB