A Two-Step Mixed Pension System: How to Reinvent Social Security with the Help of Notional Accounts and Term Annuities

12 Pages Posted: 6 Nov 2019

See all articles by Inmaculada Domínguez-Fabián

Inmaculada Domínguez-Fabián

University of Extremadura - Department of Economics

Pierre Devolder

Catholic University of Louvain

Francisco del Olmo García

affiliation not provided to SSRN

Jose A Herce

affiliation not provided to SSRN

Date Written: October 1, 2018

Abstract

The change in economic and sociodemographic reality, characterized by a continuous increase in longevity, the consequences of the economic crisis, and the lack of adequate adjustments of social security retirement pension systems everywhere, entails risks for workers and the social security systems themselves. Many reforms of public pension systems have been carried out in recent years, based on modifying system parameters and structural changes. Some reforms aim at increasing capitalization in the determination of the final pension through a life annuity to complement the public retirement pension as a second retirement income. Against the background of the change of agents’ behaviors throughout the life cycle and the presence of an adverse selection problem in the annuities market, we describe in this paper a two-step mixed pension system that tries to solve the pressure that increasing longevity is putting on pension schemes to provide adequate and sustainable pensions for all. In our two-step mixed system, when workers reach their ordinary retirement age they receive a term annuity generated by their previous capitalized savings to be replaced by a social security defined contribution pure life annuity when the so-called grand age is reached. The analysis is carried out from an individual perspective, through the internal rate of return that workers will receive after ordinary retirement in both schemes compared with the one they would get with the same contributions in the current situation. We also analyze some possible transition strategies to the new system.

Keywords: Retirement Planning, Social Security, Retirement Pension Systems

JEL Classification: G10, G11

Suggested Citation

Domínguez-Fabián, Inmaculada and Devolder, Pierre and del Olmo García, Francisco and Herce, Jose A, A Two-Step Mixed Pension System: How to Reinvent Social Security with the Help of Notional Accounts and Term Annuities (October 1, 2018). Retirement Management Journal, Vol. 7, No. 1, 2018, pp. 31-40. Available at SSRN: https://ssrn.com/abstract=3391302

Inmaculada Domínguez-Fabián (Contact Author)

University of Extremadura - Department of Economics ( email )

Avda. de Elvas s/n
06071 Badajoz
Spain

Pierre Devolder

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

Francisco Del Olmo García

affiliation not provided to SSRN

Jose A Herce

affiliation not provided to SSRN

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