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Consequences for welfare and pension buffers of alternative methods of discounting future pensions*

Published online by Cambridge University Press:  22 November 2010

ALESSANDRO BUCCIOL  and
ROEL M. W. J. BEETSMA
ALESSANDRO BUCCIOL*
Affiliation:
University of Verona, University of Amsterdam and Netspar (e-mail: alessandro.bucciol@univr.it)
ROEL M. W. J. BEETSMA*
Affiliation:
University of Amsterdam, Netspar, Mn Services, Tinbergen Institute, CEPR and CESifo (e-mail: r.m.w.j.beetsma@uva.nl)
*
†Department of Economics, University of Verona, Viale dell'Università 3, 37129 Verona, Italy. Telephone: +39 045 842 5448. Fax:+39 045 802 8529.
‡Department of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands. Telephone: +31 (0)20 525 5280. Fax:+31 (0)20 525 4254.
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Abstract

We explore the implications of alternative methods of discounting future pension outlays for the valuation of funded pension liabilities. Measured liabilities affect the asset–liability ratio of pension funds and, thereby, their policies. Our framework for analysis is an applied many-generation OLG model describing a small open economy with heterogeneous agents and a two-pillar pension system (with pay-as-you-go and funded tiers) calibrated to that in the Netherlands. We compare mark-to-market discounting against various alternatives, such as discounting against a moving average of past market curves or a curve that is constant over time. The pension buffer is stabilized by adjusting indexation and contribution rates in response to demographic, economic and financial shocks in the economy. Mark-to-market valuation of liabilities produces substantially higher volatility in the pension buffers, but it also generates slightly higher aggregate welfare.

Keywords

H55138C61Funded social securitySwap curve(Mark-to-market) discountingIndexationPension bufferStochastic simulations
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 10 , Issue 3 , July 2011 , pp. 389 - 415
Copyright
Copyright © Cambridge University Press 2010

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Footnotes

*

The authors thank two anonymous referees and participants at a Netspar Pension Day for useful comments. Financial support from Mn Services and Netspar is gratefully acknowledge. The usual disclaimers apply.

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