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PENSION FUND RESTORATION POLICY IN GENERAL EQUILIBRIUM

Published online by Cambridge University Press:  16 December 2019

Pim B. Kastelein
Affiliation:
University of Amsterdam
Ward E. Romp
Affiliation:
University of Amsterdam
Corresponding
E-mail address:
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Abstract

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.

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Articles
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).

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