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

Hélène Morsomme (), Jennifer Alonso-Garcia () and Pierre Devolder ()
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Hélène Morsomme: Université catholique de Louvain, LIDAM/ISBA, Belgium
Jennifer Alonso-Garcia: Université Libre de Bruxelles
Pierre Devolder: Université catholique de Louvain, LIDAM/ISBA, Belgium

No 2024011, LIDAM Discussion Papers ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

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.

Keywords: Risk-sharing; automatic balancing mechanisms; pension design; ageing (search for similar items in EconPapers)
JEL-codes: G22 H55 J18 (search for similar items in EconPapers)
Pages: 32
Date: 2024-03-11
New Economics Papers: this item is included in nep-age and nep-pbe
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