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Demography and provisions for retirement: the pension composition, a behavioral approach

Published online by Cambridge University Press:  01 March 2021

Bernard M.S. Van Praag
Tinbergen Institute, University of Amsterdam, CESifo, IZA, Amsterdam, The Netherlands
J. Peter Hop
Tinbergen Institute, University of Amsterdam, CESifo, IZA, Amsterdam, The Netherlands
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Pensions may be provided for in a modern society by a mix of several methods, namely by voluntary individual savings, mandatory fully-funded occupational pension systems, mandatory social security financed by pay-as-you-go, and old-fashioned hoarding in cash. We call a specific mixture of the four systems a pension composition. We assume that individual workers decide on their own individual savings, that the fully-funded occupational system is decided upon by the age cohort of the median worker, and that social security is decided upon by the median voter. We assume that individual and collective pension savings are the only sources of capital supply. When capital supply equals demand from industry, there is equilibrium in the capital market with a corresponding equilibrium interest rate and pension composition. In this paper, we assume a demography with one hundred age brackets and we investigate how changes in the birth rates, survival rates, and the retirement age affect the pension composition and the capital market equilibrium. Our conclusion is that for a given technology, the pension composition and the interest rate are determined by the demography and cannot be modified at will as a long-term political instrument.

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Copyright © Université catholique de Louvain 2021

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