Adequacy, Fairness and Sustainability of Pay-As-You-Go-Pension-Systems: Defined Benefit Versus Defined Contribution

Abstract

There are three main challenges facing public pension systems. First, pension systems need to provide an adequate income for pensioners in the retirement phase. Second, participants wish a fair level of benefits in relation to the contributions paid. Last but no least, the pension system would need to be financially sustainable in the long run. In this paper, we analyse defined benefit versus defined contribution schemes in terms of adequacy, fairness and sustainability jointly. Also, risk sharing mechanisms, that involve changes in the key variables of the system, are designed to restore the financial sustainability at the same time that we study their consequences on the adequacy and fairness of the system.

Keywords: Pay-as-you-go, Public pensions, Risks, Sustainability

JEL Classification: E62, H55, J26