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Annuitisation and cross-subsidies in a two-tiered retirement saving system

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  • Avanzi, Benjamin
  • Purcal, Sachi

Abstract

We develop a generalisation of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings – mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier – investment returns and annuity prices – leading to possible cross-subsidisation between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, and obviate some of the investment risk and annuity price risk that retirees face. We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.

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  • Avanzi, Benjamin & Purcal, Sachi, 2014. "Annuitisation and cross-subsidies in a two-tiered retirement saving system," Annals of Actuarial Science, Cambridge University Press, vol. 8(2), pages 234-252, September.
    • Handle: RePEc:cup:anacsi:v:8:y:2014:i:02:p:234-252_00
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    Cited by:

    1. Philipp Müller & Joël Wagner, 2017. "The Impact of Pension Funding Mechanisms on the Stability and Payoff from Swiss DC Pension Schemes: A Sensitivity Analysis," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(3), pages 423-452, July.

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