Intergenerational risk sharing in Dutch pensions Casper van Ewijk CPB Netherlands Bureau of Economic Policy Research University of Amsterdam Netspar World Pension Summit November 15, 2012
Intergenerational risk sharing human capital risk Young Old financial capital risk Centraal Planbureau 2
Risk sharing in Dutch pension system • Intergenerational risk sharing: redistribute financial risks to the young and human capital risks to the old welfare gain 2 % - 19 % of income • How to organize? mandatory participation long smoothing period, contribution rate key instrument Centraal Planbureau
Intergenerational risk sharing under DB and DC: who bears a stock market shock? Future Future generations Pensioners generations 0% 6% 18% Pensioners 25% DC DB, Dutch case Active members Active 75% members 78% Centraal Planbureau
But decreasing scope for risk sharing due to ageing and maturing of funds pension liabilities wage sum Centraal Planbureau
Contribution rates hurt the economy: pension recession of 2002-2005 18,00% 16,00% 14,00% 12,00% 10,00% Contribution rate Pensioenpremie 8,00% 6,00% GDP growth BBP groei 4,00% 2,00% Unemployment Werkgelegenheid groei 0,00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -2,00% -4,00% Centraal Planbureau
And also: funding ratio out of control 250 10 % % F 9 Funding ratio (left axis) 200 8 7 150 6 5 100 4 Interest rate (right axis) 3 50 2 1 0 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Centraal Planbureau 7
We need a new pension contract • Put more risk on the elderly - varying contribution rates no longer effective - “a good pension is a risky pension” • Intransparancy and ad hoc adjustments have lead to generational conflict - property rights unclear • Tool: value based generational accounting - determine redistributive effects pension reforms Centraal Planbureau 8
CPB: Value based generational accounting e.g. higher discount rate for pension liabilities (+1 %point) Redistribution in market value, for each birth-year. 20% netto profijt toekomstige deelnemers: -10% (geboortejaar 1990 en verder) 15% 10% 5% 0% -5% future generations -10% -10% -15% -20% 1915 1925 1935 1945 1955 1965 1975 1985 Centraal Planbureau
Future of Dutch pensions • DB no longer sustainable, nor optimal - a good pension is a risky pension - government could help by issuing wage linked bonds • Search for optimal balance of transparancy of property rights and intergenerational risk sharing - if unsuccessful: individual accounts? • Take care that pension reform is fair across generations - value based generational accounting can be helpful tool Centraal Planbureau 10
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