Intergenerational redistribution of income through capital funding pension schemes: simulating the Dutch pension fund ABP

Abstract

In most countries, the largest proportion of the pension benefits that are paid out to the elderly are brought together by the contributions of the active population. This type of financing is known as a Pay-As-You-Go-scheme. In this scheme, an important ‘chain of solidarity' covers for the pension of the preceding generation. So, there is a pattern of winners and losers that is caused by the rates of ageing of the populations, in combination with PAYG-pension schemes. In pension schemes based on the Capital Funding (CF) type, individuals of every generation build up a certain future pension claim. So, every generation builds up its own future pension benefit in this type of scheme. Hence, CF pension schemes are believed not to rely on income flows between generations, since every generation finances its own future pension. The advantage then is that there are no winners or losers, from the generational point of view at least, so that demographic developments cannot jeopardize the system. But, this only holds for Defined-Contribution (DC) pension systems. In practice, we also observe Defined-Benefit (DB) pension systems. In fact, the larger part of the occupational pensions schemes in the Netherlands are DB ones. For this type of schemes it holds that absence of intergenerational income flows is a too optimistic view, though the redistribution is not that strongly as in the case of PAYG schemes. The central question in this contribution is whether intergenerational redistribution of income occurs via Capital Funding in case of DB pension schemes in the Netherlands. To that end we analyse the Dutch civil servants' pension fund in the Dutch dynamic microsimulation model NEDYMAS.microsimulation; ageing; social hypotheses; poverty; inequality