On a Generalization of the World Bank Model of Retirement Savings: A Taxonomy of Systems with Two Cross-Subsidized Tiers

16 Pages Posted: 3 Sep 2009 Last revised: 10 Feb 2012

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies; University of Montreal - Department of Mathematics and Statistics

Sachi Purcal

Macquarie University - Department of Actuarial Studies; Financial Research Network (FIRN)

Date Written: February 10, 2012

Abstract

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
retirees face.

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.

Keywords: retirement savings, pensions, regulation, Switzerland, annuitization

JEL Classification: J26, D81, D91, E21, G23, H55

Suggested Citation

Avanzi, Benjamin and Purcal, Sachi, On a Generalization of the World Bank Model of Retirement Savings: A Taxonomy of Systems with Two Cross-Subsidized Tiers (February 10, 2012). UNSW Australian School of Business Research Paper No. 2009ACTL09. Available at SSRN: https://ssrn.com/abstract=1466386 or http://dx.doi.org/10.2139/ssrn.1466386

Benjamin Avanzi (Contact Author)

UNSW Australia Business School, School of Risk and Actuarial Studies ( email )

UNSW Sydney, NSW 2052
Australia

University of Montreal - Department of Mathematics and Statistics ( email )

Montreal, Quebec H3C 3J7
Canada
+1 514 343 6695 (Phone)

Sachi Purcal

Macquarie University - Department of Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Paper statistics

Downloads
191
Rank
130,293
Abstract Views
1,477