IDEAS home Printed from https://ideas.repec.org/p/aiz/louvad/2024011.html

Intergenerational risk sharing in pay-as-you-go pension schemes

Author

Listed:
  • Morsomme, Hélène

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Alonso-Garcia, Jennifer

    (Université Libre de Bruxelles)

  • Devolder, Pierre

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

Abstract

Population ageing undermines traditional social security pension systems that combine pay-as-you-go (PAYG) and defined benefits (DB). Indeed, demographic risk, if guaranteed benefits remain unaltered, will be borne entirely by workers through increases in the contribution rate. To avoid a substantial increase of the contributions and in order to maintain simultaneously the financial sustainability and the social adequacy of the public pension system, risk sharing and automatic balancing mechanisms need to be put in place. We present a two-step convex family of risk-sharing mechanisms. The first shares the risk between contributors and retirees through adjustments in the contribution rate, used to calculate the global covered wage bill, and the benefit ratio that represents the relationship between average pensions and wages. The second step studies how the retirees’ risk should be shared between the different retirees’ generations through adjustments in the replacement rate and a sustainability factor that affects pension indexation during retirement. We perform a detailed study of the effect of social planner’s targets and solidarity weight between various generations in a deterministic and stochastic environment.

Suggested Citation

  • Morsomme, Hélène & Alonso-Garcia, Jennifer & Devolder, Pierre, 2024. "Intergenerational risk sharing in pay-as-you-go pension schemes," LIDAM Discussion Papers ISBA 2024011, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvad:2024011
    as

    Download full text from publisher

    File URL: https://dial.uclouvain.be/pr/boreal/en/object/boreal%3A285930/datastream/PDF_01/view
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Schokkaert, Erik & Devolder, Pierre & Hindriks, Jean & Vandenbroucke, Frank, 2020. "Towards an equitable and sustainable points system. A proposal for pension reform in Belgium," Journal of Pension Economics and Finance, Cambridge University Press, vol. 19(1), pages 49-79, January.
    3. Jennifer Alonso-García & María del Carmen Boado-Penas & Pierre Devolder, 2018. "Adequacy, fairness and sustainability of pay-as-you-go-pension-systems: defined benefit versus defined contribution," The European Journal of Finance, Taylor & Francis Journals, vol. 24(13), pages 1100-1122, September.
    4. Chen, An & Kanagawa, Motonobu & Zhang, Fangyuan, 2023. "Intergenerational risk sharing in a defined contribution pension system: analysis with Bayesian optimization," ASTIN Bulletin, Cambridge University Press, vol. 53(3), pages 515-544, September.
    5. Alonso-Garcia, Jennifer & Boado-Penas, Maria del Carmen & Devolder, Pierre, 2018. "Adequacy, fairness and sustainability of pay-as-you-go-pension-systems: defined benefit versus defined contribution," LIDAM Reprints ISBA 2018026, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    6. Torricelli, Lorenzo, 2022. "The effect of an instantaneous dependency rate on the social equitability of hybrid PAYG public pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 21(1), pages 56-75, January.
    7. Cairns, Andrew, 2000. "Some Notes on the Dynamics and Optimal Control of Stochastic Pension Fund Models in Continuous Time," ASTIN Bulletin, Cambridge University Press, vol. 30(1), pages 19-55, May.
    8. Baurin, Arno & Hindriks, Jean, 2023. "Intergenerational consequences of gradual pension reforms," European Journal of Political Economy, Elsevier, vol. 78(C).
    9. Catherine Donnelly, 2017. "A Discussion of a Risk-Sharing Pension Plan," Risks, MDPI, vol. 5(1), pages 1-20, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Henrique Ferreira Morici & Elena Vigna, 2025. "Optimal additional voluntary contribution in DC pension schemes to manage inadequacy risk," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 48(2), pages 1031-1063, December.
    3. Alvarez, Jesús-Adrián & Kallestrup-Lamb, Malene & Kjærgaard, Søren, 2021. "Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 363-375.
    4. Julia Callaway & Cosmo Strozza & Sven Drefahl & Eleonora Mussino & Ilya Kashnitsky, 2024. "Mortality inequalities at retirement age between migrants and non-migrants in Denmark and Sweden," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 50(18), pages 473-502.
    5. Xingmin Yin & Haitao Xia & Xiaochen Zheng, 2025. "An Evaluation of China’s Basic Pension Insurance Benefit Adjustment Policy to Ensure Sustainability, Guarantee, and Fairness," Sustainability, MDPI, vol. 17(3), pages 1-22, February.
    6. Cetin, Sefane & Hindriks, Jean, 2023. "Sustainability of pension reforms: An EU-wide political stress," LIDAM Discussion Papers CORE 2023016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Mariarosaria Coppola & Maria Russolillo & Rosaria Simone, 2019. "An Indexation Mechanism for Retirement Age: Analysis of the Gender Gap," Risks, MDPI, vol. 7(1), pages 1-13, February.
    8. Diego Wachs & Jorge Onrubia, 2021. "Automatic adjustment mechanisms in public pension reforms: Effects over fiscal sustainability, adequacy, and fairness," Working Papers 2021-05, FEDEA.
    9. Jesús-Adrián Álvarez & Malene Kallestrup-Lamb & Søren Kjærgaard, 2020. "Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans," CREATES Research Papers 2020-17, Department of Economics and Business Economics, Aarhus University.
    10. Antoine Bozio & Simon Rabaté & Audrey Rain & Maxime To, 2019. "Quelles règles de pilotage pour un système de retraite à rendement défini?," PSE-Ecole d'économie de Paris (Postprint) halshs-02514738, HAL.
    11. BAURIN Arno, & HINDRIKS Jean,, 2020. "Pension financing and individual retirement account," LIDAM Discussion Papers CORE 2020004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Christl, Michael & Kucsera, Dénes, 2015. "Reformoptionen des österreichischen Pensionssystem und ihre finanziellen Auswirkungen," EconStor Preprints 113283, ZBW - Leibniz Information Centre for Economics.
    13. Bruhn, Kenneth & Steffensen, Mogens, 2013. "Optimal smooth consumption and annuity design," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2693-2701.
    14. Agnieszka Konicz & David Pisinger & Alex Weissensteiner, 2015. "Optimal annuity portfolio under inflation risk," Computational Management Science, Springer, vol. 12(3), pages 461-488, July.
    15. Ngwira, Bernard & Gerrard, Russell, 2007. "Stochastic pension fund control in the presence of Poisson jumps," Insurance: Mathematics and Economics, Elsevier, vol. 40(2), pages 283-292, March.
    16. Huang, Jianhui & Wang, Guangchen & Wu, Zhen, 2010. "Optimal premium policy of an insurance firm: Full and partial information," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 208-215, October.
    17. Alessandra Milazzo & Elena Vigna, 2018. "The Italian Pension Gap: a Stochastic Optimal Control Approach," Carlo Alberto Notebooks 553, Collegio Carlo Alberto.
    18. Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2004. "Optimal risk management in defined benefit stochastic pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 34(3), pages 489-503, June.
    19. 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).
    20. Benjamin Avanzi & Debbie Kusch Falden & Mogens Steffensen, 2022. "Stable Dividends under Linear-Quadratic Optimization," Papers 2210.03494, arXiv.org.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aiz:louvad:2024011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nadja Peiffer (email available below). General contact details of provider: https://edirc.repec.org/data/isuclbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.