Privatizing Pensions : More than an Interesting Thought?

Privatization of public pension schemes, partial or complete, is on the political agenda in many countries. In the Netherlands, the discussion focuses on second-pillar pension schemes. Although these schemes are funded, they feature intergenerational risk sharing. This paper documents the consumption, labour supply and welfare effects of a privatization of these second-pillar schemes. It adopts a stochastic model of life-cycle planning that includes endogenous saving, investment and labour supply behavior. The analysis offers a decomposition of the welfare effect of privatization in order to assess the effects of intergenerational risk sharing and of labour market distortions