The Consequences of Indexed Debt for Welfare and Funding Ratios in the Dutch Pension System

Using a model of a two-pillar pension system, designed after and calibrated to the Dutch situation, we explore for the funding ratio of pension funds and the welfare of individuals the implications of replacing nominal debt in the pension fund's portfolio with indexed debt. We consider price-indexed, wage-indexed and longevity-indexed debt. The welfare consequences of indexed debt are only modest, while the same is the case for the effect on the volatility of the funding ratio when the full menu of shocks is present. The effect on the funding ratio is limited even in the presence of only the shocks to which the debt is indexed. In fact, a too large share of wage-indexed debt may destabilise the funding ratio