On a Generalization of the World Bank Model of Retirement Savings: A Taxonomy of Systems with Two Cross-Subsidized Tiers
UNSW Australia Business School, School of Risk and Actuarial Studies; University of Montreal - Department of Mathematics and Statistics
Macquarie University - Department of Actuarial Studies; Financial Research Network (FIRN)
February 10, 2012
UNSW Australian School of Business Research Paper No. 2009ACTL09
We develop a generalization of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings --- mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier --- investment returns and annuity prices --- leading to possible cross-subsidization between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, as well as obviate some of the investment risk and annuity price risk that
We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidization occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.
Our modelling is inspired by the Swiss second pillar model, which serves as a motivation and illustration. The Swiss system features unique properties and remarkable outcomes. These include both high levels of savings and (unforced) annuitization, as well as a non-trivial level of internal cross-subsidies between the two tiers of the system. The analysis allows us to shed some light on some of the issues the Swiss system is currently facing.
Number of Pages in PDF File: 16
Keywords: retirement savings, pensions, regulation, Switzerland, annuitization
JEL Classification: J26, D81, D91, E21, G23, H55
Date posted: September 3, 2009 ; Last revised: February 10, 2012