Abstract
Using funded and unfunded pillars, the optimal pension structure is estimated using an over-lapping generation model, calibrated to the average OECD countries. While simulating different pillar sizes, a socio-economic characteristic was revealed in which low-earning groups are prone to unexpected market risks than high-earning cohorts and support a larger contribution than better-off individuals. This led to high contribution rates for funded pillars and low contributions rates for social security pillars. This suboptimal allocation leads to inefficient hedging capability for the pension portfolio. An alternative is a minimum pension guarantee as an efficient system stabilizer as it rebalances the economic cost among different earning cohorts. However, the guarantee might be expensive to implement if not capitalized early in the working phases in an era of aging populations, low birth rates, and deep financial crisis.
Highlights
Since the 1990s, countries around the globe have introduced structural pension reforms, moving from the public pay-as-you-go (PAYG) defined benefit (DB) model to individual accounts (Ebbinghaus, 2015)
It is found that the optimal values of the median income are closer to the high-earning cohorts than low-earning cohorts
This anomaly is practically realized in the market by obligating low-earning cohorts to a sub-optimal contribution rate and riskier investments that they would rather avoid (Wolf & Caridad, 2021)
Summary
Since the 1990s, countries around the globe have introduced structural pension reforms, moving from the public pay-as-you-go (PAYG) defined benefit (DB) model to individual accounts (Ebbinghaus, 2015). Different factors After s = TR, there is no income but the obtained influence the potential gains when considering inter- from the social security pay-as-you-go system, PU, generational risk-sharing and the environment and plus the yields, PF, of the private fund, to a total personal risk aversion, leading to a dual system with Ps = PU + PF, assumed to be constant during the a large pay-as-you-go pillar It is worth mentioning the emergence strand of literature studying the process of pension reversals in funded pension schemes (Naczyk & Domonkos, Cs = Ws(1 – τ), for s ≤ TR, that is, during the working period, and Cs = Ps, for s ∈ (TR, TD). To the privately funded pillar, which is achieved by maximizing the (common) utility function
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