This paper contributes to the discussion about mandatory participation in collective funded pension schemes. It explores under what circumstances individual participants exercise the option to exit such scheme if participation is voluntary. First, we show how the willingness to participate increases when there are more future exercise dates. Then, we show how the pension fund's set of policy instruments can be designed to minimise the likelihood that cohorts exit the pension scheme. The instruments consist of contribution and indexation policies. Recovery of the funding ratio (ratio of assets over liabilities) to its regulatory target level may be based on uniform contributions or age-dependent contributions which are actuarially fair in expectation. Specifically, while the value of the exit-option deters younger workers from exiting the pension fund, a uniform contribution policy encourages older workers to stay in the pension scheme.
In a pension system with uniform policies for contribution and accrual, each participant has the same contribution rate and accrual rate independent of the age at the time of payment. This is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. This paper shows the presumably unintended redistributive effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system. We first analyze a stylized model with three overlapping generations to show the intuition behind these effects. Then, we quantify these effects in a more detailed model with multiple overlapping generations, realistic parameters and more detailed information on the income distribution, calibrated on the Dutch funded pension system. We first use this model to show that there is a substantial transfer of income from poor to wealthy participants under a pension scheme with uniform policies: about 10 billion euros are transferred from poor to wealthy participants under the current uniform contribution policies in the Netherlands. We then calculate the gross aggregate transition effect of abolishing the uniform policy pension for an actuarially fair system to be about 37 billion euros (or about 5% of the Dutch GDP). 1 For each cohort, the redistributive effects are less than 5% of their total pension.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.