Annuitisation and Cross-Subsidies in a Two-Tiered Retirement Saving System
Annals of Actuarial Science, Volume 8, Issue 02, September 2014, pp 234-252
Posted: 5 Jan 2014 Last revised: 28 Sep 2015
Date Written: January 4, 2014
We develop a generalisation 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-subsidisation 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-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.
Keywords: retirement savings, pensions, regulation, annuitisation
JEL Classification: J26, D81, D91, E21, G23, H55
Suggested Citation: Suggested Citation