Managing the baby boomer demographic wave in defined contribution pension systems

Abstract

In the forthcoming decades, the problem of baby boomer retirement will put pressure on the sustainability of social security systems in a large number of countries in the world. We refer to this phenomenon as a demographic wave problem and in this paper we propose an operating method, developed on the basis of a general principle, which allows us to manage the issues of sustainability and intergenerational equity that arise when the demographic wave disrupts the demographic, economic, and financial stability of a defined contribution pension system. This principle overcomes the classical juxtaposition between the two alternative schemes of financial management of a pension system, funded or pay-as-you-go. Indeed, our approach shows that only the unmanageable pay-as-you-go part of the pension system, namely the group of individuals of the demographic wave, needs to be fully funded and not the whole pension system as is argued in the existing literature.