Funded-capitalized pension designs and the demand for minimum pension guarantee

  • Received July 18, 2020;
    Accepted January 5, 2021;
    Published April 15, 2021
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/pmf.10(1).2021.02
  • Article Info
    Volume 10 2021, Issue #1, pp. 12-24
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This work is licensed under a Creative Commons Attribution 4.0 International License

Using funded and unfunded pillars, the optimal pension structure is estimated using an over-lapping generation model, calibrated to the average OECD countries. While simulating different pillar sizes, a socio-economic characteristic was revealed in which low-earning groups are prone to unexpected market risks than high-earning cohorts and support a larger contribution than better-off individuals. This led to high contribution rates for funded pillars and low contributions rates for social security pillars. This suboptimal allocation leads to inefficient hedging capability for the pension portfolio. An alternative is a minimum pension guarantee as an efficient system stabilizer as it rebalances the economic cost among different earning cohorts. However, the guarantee might be expensive to implement if not capitalized early in the working phases in an era of aging populations, low birth rates, and deep financial crisis.

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    • Figure 1. Individual preferences concerning median income cohort preferences
    • Figure 2. Guarantee implementation: the change in the normalized utility per earning decile
    • Figure 3. Implementation of minimum pension guarantee in Europe
    • 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