Optimal mix between Pay-As-You-Go and Funding in a multi-generational Overlapping Generations framework
(2014) 18th International Congress on Insurance: Mathematics & Economics — Location: Shanghai (China) (10.July.2014)
Files
ShanghaiIME-v2.pdf
Restricted Access - Adobe PDF
- 484.61 KB
Details
- Authors
- Abstract
- Classical public pensions systems are financed through Pay-as-you-go (PAYG), meaning that current contributions finance the expenditure on pensions. However, some countries combine funding and PAYG financing techniques, see Könberg et al. (2006). 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 PAYG. Here we introduce the issue of diversification between PAYG and funding for public pension system. This is done in the specific context of a Defined Contribution design with constant contribution rate. This problem was already introduced in Devolder et al. (2014) for the case of a constant allocation over time. We generalize this result in a multi-generational Overlapping Generations framework. The age-dependent optimal allocation is calculated for a reference cohort participating in the scheme. Finally, we study the allocation problem involving all contributing cohorts. The aim is to obtain the age-dependent allocation per cohort which will maximize their pension wealth at retirement, and which ensures liquidity to pay the expenditure on pensions for the same year. This constrained optimization problem gives a result which depends on age, wealth accumulated so far, survival probability, the risk associated to the remaining contribution period and the liquidity of the system.
- Affiliations
Citations
Alonso Garcia, J. (2014). Optimal mix between Pay-As-You-Go and Funding in a multi-generational Overlapping Generations framework. 18th International Congress on Insurance: Mathematics & Economics, Shanghai (China). https://hdl.handle.net/2078.5/194497