Optimal mix between pay as you go and funding for pension liabilities in a stochastic framework
(2012) , 67 pages
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- Abstract
- This paper deals with the financing of public pension in a stochastic environment. Traditionally funded and unfunded schemes have been considered as opposite solutions and enemies for a first pillar public pension. But more recently, different countries as Sweden or Poland are exploring mix solutions combining pay as you go and funding mechanisms. The purpose of this paper is to check the rationality of such a combination using portfolio theory arguments and to find the optimal splitting of the contributions between the two systems. We first introduce the classical deterministic model leading to the well-known Samuelson rule where diversification is never optimal. Then we introduce different stochastic models where the main processes become random (wage growth, population growth, financial rate of return). We obtain in particular conditions on the parameters in order to justify the diversification and the explicit optimal sharing between pay as you go and funding.
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Citations
Devolder, P., Melis, R., & Miller, A. (2012). Optimal mix between pay as you go and funding for pension liabilities in a stochastic framework (ISBA Discussion Paper 2012/29). https://hdl.handle.net/2078.5/204653