Structure of Intergenerational Risk-Sharing Plans: Optimality and Fairness

Abstract

In this paper, we discuss optimal design for stylized Intergenerational Risk Sharing (IRS) pension plans. We study an IRS plan under which both contributions and pension benefits are adjusted based on the level of pension assets. Our optimization focuses on the stability of members’ lifetime consumption, both in the contribution and benefit phases, through formulating the optimization as an ergodic control problem. We illustrate the drawbacks of unconstrained optimization and demonstrate the importance of including regulatory requirements for the sake of fairness across generations. In this formulation, the employers are not included; implicitly, it is assumed that employer contributions would be paid as salary to the workers if not required for the plan, so the employer risk is eliminated.