Economy wide risk diversification in a three-pillar pension system

We model a three-pillar pension system and analyse the impact of exogenous shocks on an open economy, using an overlapping generation model where individuals live for two periods. The three-pillar pension system consists of (1) a PAYG pension system, (2) a defined benefits pension fund, and (3) private savings. The economy is exposed to an ageing trend, inflation and a stock market crash. We show that in the three-pillar pension system the impact of these shocks on the economy is mitigated when compared to a two- pillar system, since each shock has a different impact on the three pillars. In order to illustrate the working of the model with respect to the impact of shocks, both in magnitude and the development over time, we provide simulation results for the Netherlands.