IDEAS home Printed from https://ideas.repec.org/p/aiz/louvar/2020025.html
   My bibliography  Save this paper

Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

Author

Listed:
  • Devolder, Pierre

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

  • Levantesi, Susanna

    (Sapienza University of Rome, Italy)

  • Menzietti, Massimiliano

    (University of Calabria, Rende, Italy)

Abstract

Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical applicationwe apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.

Suggested Citation

  • Devolder, Pierre & Levantesi, Susanna & Menzietti, Massimiliano, 2020. "Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system," LIDAM Reprints ISBA 2020025, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2020025
    DOI: https://doi.org/10.1007/s10479-020-03819-x
    Note: In: Annals of Operations Research - to appear (2020)
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Devolder, Pierre & de Valeriola, Sébastien, 2020. "Between DB and DC: optimal hybrid PAYG pension schemes," LIDAM Reprints ISBA 2020016, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    2. Robert Holzmann, 2017. "The ABCs of nonfinancial defined contribution (NDC) schemes," International Social Security Review, John Wiley & Sons, vol. 70(3), pages 53-77, July.
    3. Markus Knell & Doris Prammer, 2006. "The Austrian Pension System – How Recent Reforms Have Changed Fiscal Sustainability and Pension Benefits," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 69-93.
    4. Paolo Battocchio & Francesco Menoncin & Olivier Scaillet, 2007. "Optimal asset allocation for pension funds under mortality risk during the accumulation and decumulation phases," Annals of Operations Research, Springer, vol. 152(1), pages 141-165, July.
    5. Miloš Kopa & Vittorio Moriggia & Sebastiano Vitali, 2018. "Individual optimal pension allocation under stochastic dominance constraints," Annals of Operations Research, Springer, vol. 260(1), pages 255-291, January.
    6. 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.
    7. Robert Holzmann & Edward Palmer, 2006. "Pension Reform : Issues and Prospects for Non-Financial Defined Contribution Schemes," World Bank Publications - Books, The World Bank Group, number 6983.
    8. Carlos Vidal-Meliá & María del Carmen Boado-Penas & Ole Settergren, 2009. "Automatic Balance Mechanisms in Pay-As-You-Go Pension Systems," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(2), pages 287-317, April.
    9. Godínez-Olivares, Humberto & Boado-Penas, María del Carmen & Haberman, Steven, 2016. "Optimal strategies for pay-as-you-go pension finance: A sustainability framework," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 117-126.
    10. Willem Klein Haneveld & Matthijs Streutker & Maarten Vlerk, 2010. "An ALM model for pension funds using integrated chance constraints," Annals of Operations Research, Springer, vol. 177(1), pages 47-62, June.
    11. Markus Knell & Walpurga Köhler-Töglhofer & Doris Prammer, 2006. "The Austrian Pension System – How Recent Reforms Have Changed Fiscal Sustainability and Pension Benefits," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/06, pages 69-93.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2023. "Intergenerational actuarial fairness when longevity increases: Amending the retirement age," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 161-184.
    2. Shin Kimura & Tomoki Kitamura & Kunio Nakashima, 2023. "Investment risk-taking and benefit adequacy under automatic balancing mechanism in the Japanese public pension system," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-19, December.
    3. Sebastiano Vitali & Vittorio Moriggia, 2021. "Pension fund management with investment certificates and stochastic dominance," Annals of Operations Research, Springer, vol. 299(1), pages 273-292, April.
    4. Lorenzo Fratoni & Susanna Levantesi & Massimiliano Menzietti, 2022. "Measuring Financial Sustainability and Social Adequacy of the Italian NDC Pension System under the COVID-19 Pandemic," Sustainability, MDPI, vol. 14(23), pages 1-23, December.
    5. Sipei Xu & Jia Zhang, 2022. "Do Social Pensions Affect the Physical and Mental Health of Rural Children in China? An Intergenerational Care Perspective," IJERPH, MDPI, vol. 19(7), pages 1-25, March.
    6. Ishay Wolf & Smadar Levi, 2022. "Vague Pension Future: Empirical Evidence from the Israeli Radical Privatized Market," JRFM, MDPI, vol. 15(5), pages 1-15, April.

    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. Godínez-Olivares, Humberto & Boado-Penas, María del Carmen & Haberman, Steven, 2016. "Optimal strategies for pay-as-you-go pension finance: A sustainability framework," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 117-126.
    3. 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.
    4. Carlos Vidal-Meliá & Manuel Ventura-Marco & Juan Manuel Pérez-Salamero González, 2018. "Actuarial accounting for a notional defined contribution scheme combining retirement and longterm care benefits," Documentos de Trabajo del ICAE 2018-16, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    5. Hagen, Johannes, 2013. "A History of the Swedish Pension System," Working Paper Series, Center for Fiscal Studies 2013:7, Uppsala University, Department of Economics.
    6. Christl, Michael & Kucsera, Dénes, 2015. "Reformoptionen des österreichischen Pensionssystem und ihre finanziellen Auswirkungen," EconStor Preprints 113283, ZBW - Leibniz Information Centre for Economics.
    7. 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.
    8. Carlos Vidal-Meliá & Manuel Ventura-Marco & Juan Manuel Pérez-Salamero González, 2018. "Social Insurance Accounting for a Notional Defined Contribution Scheme Combining Retirement and Long-Term Care Benefits," Sustainability, MDPI, vol. 10(8), pages 1-36, August.
    9. Maram Alwohaibi & Diana Roman, 2018. "ALM models based on second order stochastic dominance," Computational Management Science, Springer, vol. 15(2), pages 187-211, June.
    10. Fabrizio Culotta, 2021. "Life Expectancy Heterogeneity and Pension Fairness: An Italian North-South Divide," Risks, MDPI, vol. 9(3), pages 1-22, March.
    11. Shin Kimura & Tomoki Kitamura & Kunio Nakashima, 2023. "Investment risk-taking and benefit adequacy under automatic balancing mechanism in the Japanese public pension system," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-19, December.
    12. Sánchez-Romero, Miguel & Sambt, Jože & Prskawetz, Alexia, 2013. "Quantifying the role of alternative pension reforms on the Austrian economy," Labour Economics, Elsevier, vol. 22(C), pages 94-114.
    13. Wang, Leran, 2021. "Fertility, Imperfect Labor Market, and Notional Defined Contribution Pension," The Journal of the Economics of Ageing, Elsevier, vol. 20(C).
    14. Alonso-García, J. & Devolder, P., 2016. "Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 224-236.
    15. Audrius Kabašinskas & Kristina Šutienė & Miloš Kopa & Kęstutis Lukšys & Kazimieras Bagdonas, 2020. "Dominance-Based Decision Rules for Pension Fund Selection under Different Distributional Assumptions," Mathematics, MDPI, vol. 8(5), pages 1-26, May.
    16. Hind El-Houjjaji & Abdellah Echaoui, 2020. "Notional Defined Contribution Accounts: An Application To Morocco," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 25, pages 93-108, June.
    17. Carlos Vidal-Meliá & María del Carmen Boado-Penas & Francisco Navarro-Cabo, 2016. "Notional defined contribution pension schemes: why does only Sweden distribute the survivor dividend?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 19(3), pages 200-220, July.
    18. Angel Melguizo & Manuel Balmaseda & David Taguas, 2005. "Las reformas necesarias en el sistema de pensiones contributivas en Espana," Working Papers 0505, BBVA Bank, Economic Research Department.
    19. Raffelhüschen, Bernd & Hagist, Christian & Moog, Stefan & Vatter, Johannes, 2009. "Ehrbare Staaten? Die deutsche Generationenbilanz im internationalen Vergleich," Argumente zur Marktwirtschaft und Politik 107, Stiftung Marktwirtschaft / The Market Economy Foundation, Berlin.
    20. Frédéric Gannon & Florence Legros & Vincent Touzé, 2020. "Sustainability of pension schemes. Building a smooth automatic balance mechanism with an application to the us social security," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(6), pages 377-401.

    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:louvar:2020025. 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.