In classical pension design, there are essentially two kinds of pension schemes: defined benefit (DB) or defined contribution (DC) plans. Each corresponds to a different philosophy of spreading risk between the stakeholders: in a DB the main risks are taken by the sponsor of the plan while in a DC the active members must bear all the risks. Especially when applied to social security pension systems, this traditional view can in both cases lead to unfair intergenerational equilibrium. The purpose of this paper, which focuses on social security, is twofold. First, we present alternative architectures based on a mix between DB and DC in order to achieve both financial sustainability and social adequacy. An example of this approach is the so-called Musgrave rule, but other risk-sharing approaches will be developed in a pay-as-you-go philosophy. More precisely, we build convex and log-convex families of hybrid pension schemes whose extremal points correspond to DB and DC. Second, we study these new architectures in a stochastic environment, and present different rules to select the most efficient ones. To do so, we search for optimality from a risk-sharing point of view among the new pension plans.
Pension Pay-as-you-go Risk-sharing
This is a preview of subscription content, log in to check access.
Borsch-Supan A, Reil-Held A, Wilke C (2003) How to make a defined benefit system sustainable: the sustainability factor in the german benefit indexation formula. Discussion paper of the Mannheim Institute for the Economics of Aging (37)Google Scholar
Commission de réforme des pensions 2020–2040. Un contrat social performant et fiable, 2014Google Scholar
European Commission. The 2015 ageing report. European Economy, 8, 2014Google Scholar
Holzmann R, Palmer E, Robalino D (2012) Non-financial defined contribution pension schemes in a changing pension world. World Bank, Washington D.CCrossRefGoogle Scholar
Knell M (2010) How automatic adjustment factors affect the internal rate of return of PAYG pension systems. J Pension Econ Finance 9(1):1–23CrossRefGoogle Scholar
Luciano E, Vigna E (2005) Non mean reverting affine processes for stochastic mortality. ICER Working Papers, pp 1–36Google Scholar
Musgrave R (1981) A reappraisal of social security finance. In: Skidmore F (ed) Social security financing. MIT, Cambridge, pp 89–127Google Scholar
Palmer E (2000) The Swedish pension reform model: framework and issues. Social Protection Discussion Paper of the World Bank, 12Google Scholar
Schokkaert E, Devolder P, Hindriks J, Vandenbroucke F (2018) Towards an equitable and sustainable points system. A proposal for pension reform in Belgium. J Pension Econ Finance 1–31Google Scholar
Settergren O (2001) The automatic balance mechanism of the Swedish pension system: a non-technical introduction. Wirtschaftspolitische Blatter 4:339–349Google Scholar