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A model for joint pension risks

CPB Background Document, 20 October 2015

Pension funds are faced with multiple headwinds in the coming decades: demographic risk from the continuing ageing process, wage risk from a lower productivity growth rate, and financial risk from low real interest rates.

We model the joint distribution of these risks for the Netherlands by combining well-known models from the literature. The model’s aim is to be
a building block in evaluating a wide range of policy reforms on pension policy. Evaluations are possible at an age-specific, at a cohort-specific or at an aggregate level, and for a short run analysis as well as for a long run analysis of more than a few decades. Our results indicate that migration policy is a key determinant of the population size in the Netherlands after 2060. The short run dependence between the key risks is low thereby suggesting the presence of diversification benefits of the Dutch multi-pillar pension system.

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