Participation Constraints in Pension Systems

Tinbergen Institute Discussion Paper 13-149/VI

32 Pages Posted: 24 Sep 2013

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Ward E. Romp

University of Amsterdam - Faculty of Economics and Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 23, 2013

Abstract

We explore voluntary participation in pension arrangements. Individuals only participate when participation is more attractive than autarky. The benefit of participation is that risks can be shared with future generations. We apply our analysis to a pay-as-you-go system, a funded system without buffers and a funded system with buffers. Buffers play a particularly interesting role, because they raise the sensitivity of the contributions to the asset returns. In particular, compared to a system without buffer requirements, they require higher contributions when asset returns are low. Moreover, individual contributions may be increasing or decreasing in the size of the young cohort, depending on whether the fund has more or less reserves than required. We confine ourselves to recursive settings and study equilibria characterised by thresholds on the contribution that young generations are prepared to make assuming that the future young apply the same threshold. For standard parameter settings two such equilibria exist, of which only the one with the higher threshold is consistent with the initial young being prepared to start the system. Finally, we explore the social welfare maximising policy parameter settings for various levels of uncertainty and risk aversion.

Keywords: Participation constraints, pension funds, pay-as-you-go, buffers, risk-sharing

JEL Classification: E62, H55

Suggested Citation

Beetsma, Roel M. W. J. and Romp, Ward E., Participation Constraints in Pension Systems (September 23, 2013). Tinbergen Institute Discussion Paper 13-149/VI, Available at SSRN: https://ssrn.com/abstract=2329546 or http://dx.doi.org/10.2139/ssrn.2329546

Roel M. W. J. Beetsma (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Ward E. Romp

University of Amsterdam - Faculty of Economics and Business ( email )

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