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Benefit Adequacy in Funded Pension Systems: Micro-Simulation of the Israeli Pension Scheme

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  • Ishay Wolf
  • Lorena Caridad Lopez del Rio

Abstract

Purpose: This paper aims to empirically examine the adequacy of the future benefits of the funded pension scheme. Design/methodology/approach: This study investigates a large real data sample from the largest pension fund in Israel and simulates expected benefits using a pension simulator. Findings: We found that even with relatively high market returns, the shift of pension provision from defined benefit (DB) to DC entails a significant shift of risk from capital to labor and might lead elderly participants to poverty during their retirement phase. We find Israel’s pension system to be a unique playground for exploring an almost pure defined contribution (DC) pension system with a continuous trend toward capitalization and liberalization. Practical implications: This paper details the need to implement risk-sharing mechanisms in funded schemes, which provide a risk cushion against market fluctuations and alleviate income inequality and poverty. Originality value: Due to the pandemic crisis in 2020, we also showed that the expected pension benefits were vulnerable to financial, career, and systemic shocks.

Suggested Citation

  • Ishay Wolf & Lorena Caridad Lopez del Rio, 2021. "Benefit Adequacy in Funded Pension Systems: Micro-Simulation of the Israeli Pension Scheme," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 143-164.
    • Handle: RePEc:ers:ijebaa:v:ix:y:2021:i:2:p:143-164
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    References listed on IDEAS

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    1. Chen, Damiaan H. J. & Beetsma, Roel M. W. J. & Ponds, Eduard H. M. & Romp, Ward E., 2016. "Intergenerational risk-sharing through funded pensions and public debt," Journal of Pension Economics and Finance, Cambridge University Press, vol. 15(2), pages 127-159, April.
    2. Mirela Cristea & Eleftherios Thalassinos, 2016. "Private Pension Plans: An Important Component of the Financial Market," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 110-115.
    3. Eleftherios Thalassinos & Mirela Cristea & Gratiela Georgiana Noja, 2019. "Measuring active ageing within the European Union: implications on economic development," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 14(4), pages 591-609, December.
    4. Haim Bleikh, 2016. "Poverty and Inequality in Israel: An International Perspective," LIS Working papers 661, LIS Cross-National Data Center in Luxembourg.
    5. De Menil, Georges & Murtin, Fabrice & Sheshinski, Eytan & Yokossi, Tite, 2016. "A rational, economic model of paygo tax rates," European Economic Review, Elsevier, vol. 89(C), pages 55-72.
    6. Claude Giorno & Jacques Adda, 2016. "Improving the pension system and the welfare of retirees in Israel," OECD Economics Department Working Papers 1288, OECD Publishing.
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    Cited by:

    1. Ishay Wolf, 2022. "Studying the equilibrium of pension designs when shifting to funded pension schemes: economic theory and links to political factors," SN Business & Economics, Springer, vol. 2(7), pages 1-21, July.
    2. Ishay Wolf & Lorena Caridad y Lopez del Rio, 2021. "The Expectation for Pension Insurance in Funded Schemes: Theoretical Model and Global Implementation," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 10, September.

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    More about this item

    Keywords

    Funded pension scheme; social security; poverty; minimum pension guarantee; public policy; Israel.;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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