- Consequences for welfare and pension buffers of alternative methods of discounting future pensions
- Journal of Pension Economics and Finance
- Volume | Issue number
- 10 | 3
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
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.
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