sharing in Dutch pensions Casper van Ewijk CPB Netherlands Bureau - - PowerPoint PPT Presentation

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

Centraal Planbureau

Intergenerational risk sharing

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Young Old

human capital risk financial capital risk

Centraal Planbureau

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?

Pensioners 6% Future generations 0% Active members 75% Pensioners 25% Future generations 18% Active members 78%

DB,

Dutch case

DC

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

• 4,00%
• 2,00%

0,00% 2,00% 4,00% 6,00% 8,00% 10,00% 12,00% 14,00% 16,00% 18,00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Pensioenpremie BBP groei Werkgelegenheid groei

Contribution rate GDP growth Unemployment

Centraal Planbureau

And also: funding ratio out of control

1 2 3 4 5 6 7 8 9 10 50 100 150 200 250 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% %

F Funding ratio (left axis) Interest rate (right axis)

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Centraal Planbureau

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

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Centraal Planbureau

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 1915 1925 1935 1945 1955 1965 1975 1985 netto profijt toekomstige deelnemers:

• 10% (geboortejaar 1990 en verder)

CPB: Value based generational accounting

e.g. higher discount rate for pension liabilities (+1 %point)

Redistribution in market value, for each birth-year. future generations

• 10%

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

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