Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/185572 
Year of Publication: 
2018
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2018-053/VI
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate real or nominal benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution) or changing the pension fund contribution rate on labour income (Defined Benefit). Generally, economies with Defined Contribution pension funds respond similarly to adverse capital quality shocks as economies without pension funds. Defined Benefit pension funds, however, distort labour supply decisions and exacerbate economic fluctuations. Retirees prefer Defined Benefit over Defined Contribution funds in case they face deficits, while the current and future working population prefers the opposite.
Subjects: 
Pension Fund
Regulation
Business Cycles
Life cycle
New-Keynesian model
JEL: 
J32
E32
D91
E21
Document Type: 
Working Paper

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