Optimizing the Life-Cycle Path of Pension Premium Payments and the Pension Ambition in the Netherlands

Abstract

We determine the optimal life-cycle path of pension premiums during the working ages and pension benefits during retirement, assuming that households can choose these freely. We calibrate the model on Dutch data. The optimization takes into account the fact that incomes generally rise during the working ages and that children are generally present in young households. Both features lead to an upward sloping path of optimal pension premium rates over the working life, while under the current pension system this is rather flat. The welfare gains from implementing the optimal pension system depend on the specification of the model, but can be sizable. A potentially lower return on pension assets in the future implies a further delay of optimal pension premiums during the working ages and a lower optimal pension benefit after retirement. Differentiating the path of pension premiums and benefits according to the level of educational attainment of the main income earner brings only small additional welfare gains compared to the situation in which pension premium rates are based on the average income profile in the Dutch economy.