Optimal investment and Pension policy in Pay-As-You-Go systems under forward utility and ageing population

Jennifer Alonso Garcia, Caroline Hillairet, Sarah Kaakai and Mohamed Mrad

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: This paper investigates optimal investment and pension policies in a Pay-As-You-Go (PAYG) system supplemented by a buffer fund used as an intergenerational risk‑sharing mechanism. The social planner’s preference criterion is represented by non-zero volatility forward Constant Relative Risk Aversion (CRRA) utilities, and explicitly accounts for both sustainability and adequacy constraints. The optimal policies are characterized in closed form, and an in-depth analysis of the impact of preference sensitivities on the pension scheme is conducted. A detailed numerical analysis is performed to evaluate the sustainability and benefit adequacy of this hybrid PAYG–buffer‑fund arrangement under a range of demographic, financial, and macroeconomic scenarios.

Keywords: Mixed PAYG pension with buffer fund schemes; optimal investment and pension policies; Sustainability and adequacy constraints; Demographic and financial risk sharing; Forward utility preferences (search for similar items in EconPapers)
Date: 2026-05-12
Note: Sponsorship: Europlace Institute of Finance ; ANR-21- CE46-0002
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