DP6089 Pension systems, Intergenerational Risk Sharing and Inflation

Author(s): Roel Beetsma , A Lans Bovenberg

Publication Date: February 2007

Keyword(s): (funded) pensions , fiscal policy , nominal assets , risk sharing , overlapping generations

JEL(s): E21 , H55 , J18

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6089.asp

We investigate intergenerational risk sharing in two-pillar pension systems with a pay-as-you-go pillar and a funded pillar. We consider shocks in productivity, depreciation of capital and inflation. The funded pension pillar can be either defined contribution or defined benefit, with benefits defined in real or nominal terms or indexed to wages. Optimal intergenerational risk sharing can be achieved only in the presence of a defined benefit pension system with appropriate restrictions on investment policy of the funded pillar. In this way, both generations have similar exposures to financial and human capital risks.