Pension Reforms and Risk Sharing Cycle: A Theory and Global Experience

Purpose: This paper offers an explanation to pension systems cyclical reforms, based on Central East Europe (CEE) countries experience over the last three decades. Design/Methodology/Approach: This paper develops a theory of risk sharing process and demonstrate it based on global experience over the last two decades. Finding: During the transition to funded pension design, the government not only transfers longevity and fiscal risks to the individual but also absorbs risks transferred from the public, where each market actor transfers undiversifiable risks to the other. The outcomes of this risk path realized in financial transfers, such as social security, means-tested and minimum pension guarantee. Consequently, funded pension designs naturally converge to a new landscape paradigm of risk sharing, including intergenerational and intra-generational play. Financial crises such as the recent COVID-19 pandemic foster the convergence process. Practical Implications Governments and central planners have to consider risk sharing mechanisms to ensure sustainability of pension designs during the transitions to funded schemes. Originality/Value: To the best of the author’s knowledge, no other paper attempted to study the bi-path ways of risk during the pension transition and discover the mutual expectation of the pension market actors. There is a vast literature of risk sharing study in comparison between funded and unfunded pension schemes.