Optimal mix between pay-as-you-go and funding in a multi-generational Overlapping Generations model
(2015) , 22 pages
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- Abstract
- Classical public pensions systems are usually financed through pay-as-you-go, meaning that current contributions finance the pension expenditures. However, some countries combine funding and pay-as-you-go as financing techniques. The idea behind this mixed system is to allocate a part of the individual’s contribution to an individual funded account, whereas the other part is allocated to pay-as-you-go. Here we study under which conditions diversification occurs between these two financing techniques in two different contexts: for a cohort entering the system and for multiple cohorts coexisting at the same period of time. We study as well the diversification benefits in the presence of a constraint which should ensure that the income from contributions is sufficient to cover the expenditure on pensions. We apply this setting to Belgian data and show that mixing funding and pay-as-you-go provides higher benefits and liquidity than pure pay-as-you-go for a limited transition cost.
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Citations
Alonso Garcia, J., & Devolder, P. (2015). Optimal mix between pay-as-you-go and funding in a multi-generational Overlapping Generations model (ISBA Discussion Paper 2015/10). https://hdl.handle.net/2078.5/191329