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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
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    References listed on IDEAS

    as
    1. 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.
    2. Baurin, Arno & Hindriks, Jean, 2023. "Intergenerational consequences of gradual pension reforms," European Journal of Political Economy, Elsevier, vol. 78(C).
    3. 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).
    4. 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.
    5. Catherine Donnelly, 2017. "A Discussion of a Risk-Sharing Pension Plan," Risks, MDPI, vol. 5(1), pages 1-20, February.
    6. 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.
    7. 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.
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    Keywords

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    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

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