A Two-Steps Mixed Pension System: An Aggregate Analysis

Abstract

The change in the economic and sociodemographic context, framed by a continuous increase in longevity, the consequences of the economic crisis as well as the lack of adequate adjustments of the Social Security retirement pension systems everywhere, entail risks for workers and for the Social Security itself. Against the background of the change in agents’ behaviors throughout the life cycle and the presence of an adverse selection problem in the annuities market, we describe in this paper a ‘two-steps mixed pension system’ that tries to solve the pressure that increasing longevity is putting on conventional pension schemes to provide adequate and sustainable pensions for all. In our proposal, Social Security, preceded by a term-annuities scheme, is ‘reinvented’ to continue to ensure retirees’ incomes from their ‘grand age’ onwards.