Research activities

Task 1: Intragenerational equity

Older people differ in terms of pension and labour incomes, financial wealth, household composition, social networks, housing, health and human capital. Policymakers require in-depth knowledge about groups of people that are not well prepared for retirement, so that they can target these groups in their social policies (eg pensions, welfare, long-term care, housing) and alleviate potential adverse welfare effects of policy reforms (such as pension reforms).

Pension systems are intimately related to labour markets and the health status of the population. This relationship goes both ways. On the one hand, employment, health and active aging impact both retirement behaviour and the pension rights people accumulate during their working lives. On the other hand, pension systems are key determinants of labour-market behaviour in general and the speed and timing of retirement in particular. Through its impact on employment and the income of the retired population, pension systems affect social welfare, for example by broadening the base for financing health care and other social programs and by impacting the health of the population.

The research explored the impacts of private saving programmes (which the government may initiate through compulsion, tax privileges or defaults) and private and public insurances and financial innovation (eg reversed mortgages) on projected old-age incomes and poverty risks in old age of various heterogeneous individuals. The research also explored the distribution of total income of present and future retirees in selected countries, taking into account public pensions, occupational pensions, labour income, private savings, housing wealth, and private and social insurances (including disability insurance and long-term care insurance).

We examined whether people are saving enough for retirement and to what extent they have to adjust their standard of living after retirement. Vulnerable groups were classified on the basis of age, gender, marital status, ethnicity, income sources, social networks and, possibly, health status. We combined various sources of survey data and administrative data (eg on pension entitlements) and developed models that can explore the link between retirement income and individual and household labour supply before retirement.

We investigated to what extent active aging associated with higher labour supply of the elderly can help prevent the risk of poverty in old age and improve the quality of life. We developed dynamic models to assess the impact of pension reforms on the financial well-being of elderly people with different socioeconomic characteristics and health status. We also included retirement behaviour in these models to explore how policy reforms may help to extend the working life, thereby reducing the risk of old-age poverty. We conducted this research in a European comparative setting by studying these issues in selected European countries.

Task 2: Intergenerational risk sharing

Governments are curtailing the role they play in pension insurance in many countries. At the same time, corporations are withdrawing from their role as sponsor of defined-benefit plans. As a result, in many countries, individuals have to resort to individual defined-contribution plans. In these plans, individuals themselves are responsible for planning how much to save for retirement, how to invest their savings in the capital market and benefit optimally from risk premia without running excessive risks, and how to insure individual longevity risk by converting pension capital into annuity income.

Also, the current EU debt crisis makes more private funding of pensions desirable; more private retirement saving has become necessary to maintain old-age incomes when public pensions are being cut under pressure, either as a result of the current debt crisis or due to longer-term pressures of population ageing.

Private savings in pension funds may also contribute to more stable and deeper capital markets, thereby reducing systematic risks in the financial system. Pension funds are better able to deal with macroeconomic risks than banks because pension funds adopt investment strategies with a long time horizon. At the same time, private pensions are exposed to macro-economic risks and financial market risks and this raises the question how these risks can best be managed.

This research explored optimal management of these macro-economic risks across generations in collective pension plans: how can this best be shared among the various stakeholders? It also investigated the optimal management of risk (eg financial market, interest rate, (wage) inflation, longevity risk) in individual pension plans during both the accumulation and the decumulation stages and how this management depends on other assets (such as human capital, housing and other social insurances).

The research analysed how governments can facilitate intergenerational sharing of macro-economic risks in pension plans through insurance or by providing tradable financial assets (such as GDP bonds and longevity bonds). We also explored how social insurances, public debt policy, the tax-transfer system and risk-sharing rules in collective pension plans can conduct optimal intergenerational risk sharing. To explore these issues, this research documented the most important macro-economic risks in various countries through time-series econometrics (eg of longevity risks) and developed life-cycle models with macro-economic risks.

Task 3: Effective communication of pension risks

Individuals are increasingly bearing greater responsibility for their own financial well-being during retirement. People face more and more decisions on how much to save for retirement, on how to allocate retirement wealth and on what insurance products to buy. However, individuals find it very hard to navigate financial and insurance markets, and the consequences of mistakes can be substantial.

This raises the question how we can promote efficient life-cycle financial planning in a cost-effective manner. This research explored how pension plans can best communicate and frame risk and project pension benefits and replacement rates so as to help individuals make good saving, investment and insurance decisions. This research can help policymakers in designing reporting standards for pension funds and individual pension plans. We compare current practices in the Netherlands and Italy and investigate how they can be improved.

To analyse these issues, we worked with focus groups and conducted both field and laboratory experiments. We also explored how information provision and financial literacy may affect saving, investment and insurance decisions, and whether we can enhance financial literacy and affect behaviours in a cost-effective way. To accomplish this, we tested and developed micro-econometric models in which financial literacy, consumption and wealth are jointly determined. We tested these models using comparative European data from the Survey of Health, Aging, Retirement in Europa (SHARE).