Risk reallocation in defined-contribution funded pension systems

This paper explores the introduction of collective risk-reallocation elements in defined contribution pension contracts. We consider status-contingent, age-contingent and asset-contingent arrangements to reallocate risk among participants. Eliminating asset market riskfor the retired raises their welfare, while it lowers welfare of the workers, despite the fact that they benefit later from the same arrangement. Overall welfare falls. The welfare effects arelargest when personal and pension portfolios are optimally chosen. Allowing for intragenerational heterogeneity, the highest-skilled retirees benefit most, while the highest-skilled workerslose most. Our main results are qualitatively robust to a number of model variations and extensions.

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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