Differentiating Indexation in Dutch Pension Funds |
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Authors: | Roel M W J Beetsma Alessandro Bucciol |
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Institution: | (1) National Economics University (NEU), 207 Giai Phong Street, Hai Ba Trung District, Hanoi, 10000, Vietnam;(2) National Graduate Institute for Policy Studies (GRIPS), 7-22-1 Roppongi, Minato-ku, Tokyo 106 8677, Japan |
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Abstract: | Funded social security programs are particularly vulnerable to economic and financial market shocks. As a consequence of the
recent crisis, a large fraction of the Dutch pension funds had to submit restoration plans for the recovery of their buffers.
Such plans will have to rely primarily on a mix of reduced benefit indexation and increased pension contributions. Hence,
a discussion has emerged whether indexation should be differentiated across the various groups of participants in a pension
fund. We investigate this issue numerically, developing an applied many-generation small open-economy OLG model with heterogeneous
agents. The pension system consists of a first-pillar PAYG component and a second pillar with a pension fund. In our stochastic
simulations, we hit the economy with a variety of unexpected demographic, economic and financial shocks. We compare uniform
indexation of pension rights across all fund participants with alternatives such as status-contingent indexation in which
pensions are protected against price inflation. While the aggregate welfare consequences are small, group-specific consequences
are more substantial with the workers and future born losing and retirees benefitting from a shift away from uniform indexation.
The exception is a scheme which links indexation directly to the fund’s asset performance. Under this scheme the retired benefit
without other groups losing. The welfare effects are primarily the result of systematic welfare redistributions rather than
of shifts in the benefits of risk sharing. Contribution rates always have to rise substantially from their initial levels
to maintain the system’s sustainability. An increase in the retirement age that leaves existing pension rights untouched does
little to avoid this rise with its adverse labour market consequences. |
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