Pension Fund Restoration Policy in General Equilibrium

This paper quantifies the business cycle effects and distributional implications of pension fund restoration policy after the economy has been hit by a financial shock. We extend a canonical New-Keynesian dynamic general equilibrium model with a tractable demographic structure and a pension fund. Numerical simulations show that economies with pension funds that primarily write off accumulated pension wealth to restore financial adequacy behave similarly to an economy without a pension fund. Significant deviations from laissez-faire arise when the pension fund increases the pension fund contribution rate to close the funding gap or postpones the closure of the funding gap. At a cost of significantly distorting aggregate labour supply and output, the pension fund can shelter the group of retirees from unanticipated shocks by guaranteeing the value of their accumulated pension wealth. A defined benefit pension fund can be welfare improving to the group of agents that is already born in the period the financial shock hits. However, since pension funding gaps are typically closed over an extended period of time, a part of the welfare gains to currently alive agents comes at the expense of future, currently unborn, generations