Abstract
In the uncertain environment of population and economy; the pension plan for urban employees in China is under threat from various types of financial risk. This paper mainly builds a comprehensive risk assessment system to evaluate the solvency sustainability of the urban employees’ pension plan of China. Specifically, we forecast annual accumulative net asset; actuarial balance; and potential support ratio for the next seventy years. To account for the impact of demographic uncertainty on long-term finances, stochastic simulations are used to estimate the probability distribution of relative risk indicators. Moreover, we integrate the Lee–Carter model into the population projection. According to the median projection, the public pension fund will have a gap in about 35 years; and the cash flow will be negative about 25 years later. Furthermore, under the existing policy, the burden of insured employees will increase rapidly. Delayed retirement could relieve the coming solvency risk, but it does not fundamentally resolve the solvency problem in the long run.
Highlights
The financial risk of the pension plan has been extensively studied by academics and social security agencies, and especially, the longevity risk brought about by population aging has become a worldwide issue
Stochastic assessments of the pension fund play a double role: first, they present percentile distribution of future financial outcomes helping to deal with uncertain risks; second, to avoid frequent adjustment of policy, they highlight the need for long-term sustainable alternatives
In the stochastic actuarial framework proposed by the U.S Security Administration, we construct a comprehensive risk assessment system to monitor the financial risk of the pension plan in China
Summary
The financial risk of the pension plan has been extensively studied by academics and social security agencies, and especially, the longevity risk brought about by population aging has become a worldwide issue. Because of the uncertainty regarding future demographic developments, the exact timing and structure of related policy reforms depend on the quantitative analysis of the whole social security system. The stochastic projections of long-term finances of the pension plan could optimize the design of the old-age security system and enhance the solvency sustainability. Stochastic assessments of the pension fund play a double role: first, they present percentile distribution of future financial outcomes helping to deal with uncertain risks; second, to avoid frequent adjustment of policy, they highlight the need for long-term sustainable alternatives. Stochastic assessments of the pension fund have been investigated by many researchers and social security administrations using Monte Carlo simulation techniques [4,5,6], which is an increasingly important area in applied actuarial science.
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