Optimal pension design in general equilibrium

The present paper aims to quantify efficiency properties of real world social security systems of various institutional designs in order to identify an optimal pension design. Starting from abenchmark economy without social security, we introduce alternative pension systems and compare the costs arising from liquidity constraints as well as labor and savings distortions versus thebenefits from insurance provision against income and lifespan uncertainty. Our findings highlight strong efficiency losses arising from both means-testing pension benefits against private assets andrestricting the contribution base while indicating a positive impact of means-testing flat benefits against earnings-related benefits within pension systems resting on several tiers. Furthermore, ourresults suggest that the negative correlation between pension progressivity and pension generosity may be justified on efficiency grounds. In our model a single-tier universal earnings-relatedpension system yields the highest efficiency gains dominating flat benefits as well as two-tier systems of any form.

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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