Optimal Mix Between Pay-As-You-Go and Funding for DC Pension Schemes in an Overlapping Generations Model

22 Pages Posted: 2 Jun 2020

See all articles by Jennifer Alonso-García

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; ARC Centre of Excellence in Population Ageing Research; Netspar

Pierre Devolder

Catholic University of Louvain

Date Written: June 16, 2016

Abstract

Public pension systems are usually pay-as-you-go financed, that is, current contributions cover the pension expenditures. However, some countries combine funding and pay-as-you-go within the first pillar. This article studies a mixed system where a part of the individual’s contribution accrues funded rights whereas the other part accrues pay-as-you-go rights. Diversification conditions between these two financing techniques are derived in a mean–variance framework for two distinct contexts: for a cohort entering the system (named ex-ante case) and for multiple cohorts coexisting at the same period of time (named ex-post case). The diversification benefits in presence of a liquidity constraint which ensures that the income from contributions is sufficient to cover the pension expenditures are also studied. We show that, on the one hand, diversification benefits individuals when the economy is dynamically efficient for the ex-ante case. On the other hand, diversification is unattractive when pay-as-ou-go and funding are positively correlated for the ex-post case.

Keywords: PAYG, Diversification, Portfolio theory, Funding, Utility

JEL Classification: H55, H75, J32

Suggested Citation

Alonso-García, Jennifer and Devolder, Pierre, Optimal Mix Between Pay-As-You-Go and Funding for DC Pension Schemes in an Overlapping Generations Model (June 16, 2016). Insurance: Mathematics and Economics, Vol. 70, 2016, Available at SSRN: https://ssrn.com/abstract=3592594

Jennifer Alonso-García (Contact Author)

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

ARC Centre of Excellence in Population Ageing Research ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Pierre Devolder

Catholic University of Louvain ( email )

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3
Abstract Views
41
PlumX Metrics