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How automatic adjustment factors affect the internal rate of return of PAYG pension systems

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  • KNELL, MARKUS

Abstract

In this paper we analyze automatic adjustment factors that can be used to keep the budget of a PAYG pension system balanced when cohort sizes fluctuate. The adjustment factors are defined in a way that is similar to their real-world counterparts and they differ in the relative weight they put on changes in the contribution rate and in the pension level. We show how the internal rate of return of the PAYG system depends on the fluctuations in cohort size and on the choice of the adjustment regime. We find that fluctuations in the cohort size have the smallest impact on the internal rate of return if the relative weight of the adjustment parameters directly corresponds to the length of the retirement period relative to the length of the working period. For reasonable numerical values, this weight is close to the actual choice in the German system.

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  • Knell, Markus, 2010. "How automatic adjustment factors affect the internal rate of return of PAYG pension systems," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(1), pages 1-23, January.
    • Handle: RePEc:cup:jpenef:v:9:y:2010:i:01:p:1-23_99
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    2. Christl, Michael & Kucsera, Dénes, 2015. "Reformoptionen des österreichischen Pensionssystem und ihre finanziellen Auswirkungen," EconStor Preprints 113283, ZBW - Leibniz Information Centre for Economics.
    3. Schröder, Carsten, 2012. "Profitability of pension contributions – evidence from real-life employment biographies," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(3), pages 311-336, July.
    4. Pierre Devolder & Susanna Levantesi & Massimiliano Menzietti, 2021. "Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system," Annals of Operations Research, Springer, vol. 299(1), pages 765-795, April.
    5. Alonso-García, Jennifer & Devolder, Pierre, 2019. "Continuous time model for notional defined contribution pension schemes: Liquidity and solvency," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 57-76.
    6. Markus Knell, 2013. "The Austrian System of Individual Pension Accounts – An Unfinished Symphony," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 47-62.
    7. Knell, Markus, 2013. "The Intergenerational Distribution of Demographic Fluctuations in Unfunded and Funded Pension Systems," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79830, Verein für Socialpolitik / German Economic Association.
    8. Szüle, Borbála, 2013. "Demográfiai hatások és implicit hozamok kapcsolata a nyugdíjrendszerekben [The relationship of demographic effects and implicit returns in pension systems]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 703-721.
    9. Metzger, Christoph, 2016. "The German statutory pension scheme: Balance sheet, cross-sectional internal rates of return and implicit tax rates," FZG Discussion Papers 63, University of Freiburg, Research Center for Generational Contracts (FZG).

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