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Pension Prefunding, Ageing, and Demographic Uncertainty

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Abstract

Pension prefunding can be used to smooth contribution rates in economies where ageing will increase pension expenditure. But how extensive should prefunding be in a defined benefit pension system when there is considerable uncertainty concerning future mortality, fertility, and migration? We study the prefunding rules in the Finnish earnings-related pension system with an OLG simulation model. The results show that increasing the degree of prefunding could yield a more even intergenerational outcome and make future generations' position better, but it is quite possible to overshoot and harm current generations too much. Making the degree of prefunding fertility-dependent appears to be a useful alternative. With declining fertility, current large cohorts would pay modestly increased contributions. The accumulated funds, however, will be huge in relation to the wage bills of smaller future cohorts.

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Authors and Affiliations

  1. The Research Institute of the Finnish Economy (ETLA), Lönnrotinkatu 4B, 00120, Helsinki, Finland

    Jukka Lassila & Tarmo Valkonen

Authors
  1. Jukka Lassila
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  2. Tarmo Valkonen
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Lassila, J., Valkonen, T. Pension Prefunding, Ageing, and Demographic Uncertainty. International Tax and Public Finance 8, 573–593 (2001). https://doi.org/10.1023/A:1011276620950

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