Optimal intergenerational risk-sharing via pension fund and government debt: Effects of the Dutch pension system redesign

The current redesign of the Dutch pension system results in less intergenerational risk-sharing (IRS) through the pension funds, which leads to lower welfare for the participants and a more volatile government debt, because of the tax exemption rule forpension savings. We study effects on the welfare and risk-sharing of generations, using a multi-period overlapping generations model, assuming that the government uses the tax rate to smooth shocks of the debt, while pension benefits and contributions dependon the funding ratio of the pension fund. Furthermore, we reproduce specific Dutch features to get more insight on the effects of the current Dutch pension system redesign.We find first that a collective scheme with optimal IRS via pension fund and government debt provides a substantially higher welfare than an optimal individual scheme without smoothing of risks over generations. Second, we quantify that reducing IRS throughthe pension fund, results in a welfare loss and requires a higher degree of IRS via the government debt. Hence, the Dutch pension system redesign should be complemented with a less restricted government debt policy, in order to secure the welfare of bothcurrent as well as future generations.