Intergenerational risk sharing in time-consistent funded pension schemes

Intergenerational risk sharing by funded pension schemes may increase welfare in an ex ante sense. However, it also suffers from a time inconsistency problem. In particular, young generations may be unwilling to start participating in a pension scheme if this requires them to make huge transfers to older generations. This paper explores if limiting the transfers between generations can make a funded pension scheme time-consistent. The paper finds that this ispossible indeed in a more or less realistic economic environment; it is not the case in general however. The form of the time-consistent scheme (how strong are the limits to transfers) is found to be very responsive to the economic environment. The time-consistent scheme offers lower welfare than the original time-inconsistent scheme, but higher welfare than a defined-contribution scheme without any intergenerational risk sharing.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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