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European Economic, Employment and Social Policy

Reforming pensions: the limits of diversification

Jan Drahokoupil (University of Mannheim and ETUI) and Stefan Domonkos (University of Mannheim)

Publication date : 2013

Number of pages : 6

Author(s) :

Jan Drahokoupil (University of Mannheim and ETUI) and Stefan Domonkos (University of Mannheim)

The assumed benefits of diversification – reducing the reliance of individuals on one form of retirement insurance – currently inform policy advice on pension reforms. The diversification argument also often justifies reforms of old age pensions, including their privatization. However, the merits of diversification, particularly if pursued through privatization, are questionable, as the authors of this Policy Brief show. They make three points in their argumentation. First, actual gains from diversification are limited. Private pension systems are not immune to regulatory risks, as often assumed. Moreover, diversification cannot protect against the macroeconomic shocks that represent the main challenges for pension systems. Secondly, the macroeconomic gains from private pillars are often overestimated in the policy debate. Finally, the costs of diversification through privatization are very high, despite the popular myth about reducing the implicit debt. In reality, retaining debt in its implicit form is the preferable option for public finances.

Collection: 3/2013
ETUI, Brussels, ISSN 2031-8782 (pdf)

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