Sustainability of funded pension schemes: A financial position perspective using options

  • Received December 10, 2020;
    Accepted July 27, 2021;
    Published October 25, 2021
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.18(4).2021.10
  • Article Info
    Volume 18 2021, Issue #4, pp. 111-119
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This study offers in-depth knowledge of the socio-economic characteristics of funded pension projects. It is based on the financial position of pension market actors during the transition of the pension system to a more funded capitalized scheme, mainly through the option benefit model. This is possible due to the fact that the economy is not viewed as a single earning cohort. The study analytically demonstrates a socio-economic anomaly in the funded pension system, which is in favor of high-earning cohorts at the expense of low-earning cohorts. This anomaly is realized due to lack of insurance and exposure to financial and systemic risks. Furthermore, the anomaly might lead to the pension re-reform back to an unfunded scheme, mainly due to political pressure. A minimum pension guarantee was found to be a rebalance mechanism to this anomaly, which increases the probability of a sustainable pension scheme. Specifically, it is argued that implementing a guarantee with an intra-generational, risk-sharing mechanism is the most effective way to reduce the impact of this abnormality. Moreover, the paper shows the convergence process toward implementing a minimum pension guarantee in many countries that have capitalized their pension systems during the last three decades, in particular in Latin America and Central and Eastern Europe.

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    • Table 1. The influence on the guarantee cost
    • Conceptualization
      Ishay Wolf, Lorena Caridad López del Río
    • Data curation
      Ishay Wolf
    • Formal Analysis
      Ishay Wolf, Lorena Caridad López del Río
    • Funding acquisition
      Ishay Wolf, Lorena Caridad López del Río
    • Investigation
      Ishay Wolf
    • Methodology
      Ishay Wolf, Lorena Caridad López del Río
    • Project administration
      Ishay Wolf
    • Resources
      Ishay Wolf
    • Writing – original draft
      Ishay Wolf
    • Validation
      Lorena Caridad López del Río
    • Writing – review & editing
      Lorena Caridad López del Río