Risk sharing and transition costs in the reform of pension systems in Europe

Miles, D., Timmermann, A., de Haan, J. & Pagano, M., Oct-1999, In : Economic Policy. 29, p. 252-286 35 p.

Research output: Contribution to journalArticleAcademicpeer-review

Unfunded pay-as-you-go state pension schemes are financially unsustainable in Europe as elsewhere. Proponents of reform argue that, by switching to a fully funded scheme that takes advantage of the high return on assets such as equities, the solvency of the state scheme could be restored at little or no financial burden to current taxpayers. We show that this is mistaken for two reasons.

First, making the transition is itself costly. Unless this cost is substantially financed by debt, it will fall on current generations, who are therefore likely to oppose the reform. Second, potentially higher returns are accompanied by significantly higher risk, which we quantify. We explain how an insurance scheme could be designed to mitigate both risk and moral hazard.

Original languageEnglish
Pages (from-to)252-286
Number of pages35
JournalEconomic Policy
Issue number29
Publication statusPublished - Oct-1999

ID: 3828499