Optimal demographic risk sharing with funded pensions in a general equilibrium model

In this paper we assess the general equilibrium effects of a two-tier pension system in intergenerational risk sharing in the presence of productivity, financial market and demographic risks. We find relatively large welfare gains from the presence of a two-tier pension system with a defined benefit second pillar when compared to laissez-faire. The first, PAYG pillar takes care of appropriate redistribution between the young and the old generation. Benefits from the fully funded second pillar allow for risk sharing between the two generations. The exact form of the defined benefit second pillar is not very important, as different specifications of the second pillar lead to almost identical welfare gains compared to laissez-faire