Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-16T01:20:06.187Z Has data issue: false hasContentIssue false
  • English
  • Français

The effect of an instantaneous dependency rate on the social equitability of hybrid PAYG public pension schemes

Published online by Cambridge University Press:  13 July 2020

Lorenzo Torricelli Open the ORCID record for Lorenzo Torricelli [Opens in a new window]
Lorenzo Torricelli*
Affiliation:
Department of Economics and Management, University of Parma, Parma, Italy
*
Corresponding author. Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The defined convex combination (DCC) pay-as-you-go public pension systems recently introduced in the literature are a form of hybridization between defined benefit (DB) and defined contribution (DC) designed to maintain intergenerational social equitability by reacting to demographic shocks in an optimal way. In this paper, we augment DCC schemes with the assumption that the dependency ratio between pensioners and workers is driven by an exogenously modelled instantaneous stochastic rate of change. This assumption enjoys support from the empirical data and allows explicit solutions for the contribution and replacement rate processes which make transparent the nature of the dynamic evolution of a DCC system, as well as the role of the variables involved. The analysis of intergenerational social equitability measures under the assumption of an instantaneous dependency rate confirms the view expressed in previous literature that neither DB nor DC achieves social fairness, and that DCC plans have the potential to improve on both. We perform a calibration test, and our findings seem to indicate that in ageing economies the DC system might indeed be superior to the DB one in terms of intergenerational fairness.

Keywords

Hybrid PAYG pension schemesinstantaneous dependency ratiosocial equitabilityH75
Type
Article
Information
Journal of Pension Economics & Finance , Volume 21 , Issue 1 , January 2022 , pp. 56 - 75
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Börsch-Supan, A, Reil-Held, A and Wilke, CB (2003) How to make a defined benefit system more sustainable: the sustainability factor in the German Benefit Indexation formula. Technical report, Discussion paper of the Mannheim Institute for the Economics of Aging.Google Scholar
Chłoń-Domińczak, A, Franco, D and Palmer, E (2012) The first wave of NDC reforms: The experience of Italy, Latvia, Poland and Sweden. In Holzmann, R, Palmer, E and Robalino, D (eds), Non-financial Defined Contribution Pension Schemes in A Changing Pension World : Progress, Lessons, and Implementation. Washington, DC: World Bank, pp. 31–84.CrossRefGoogle Scholar
Cox, JC, Ingersoll, JE and Ross, SA (1985) A theory of the term structure of interest-rates. Econometrica 53, 385–408.CrossRefGoogle Scholar
Devolder, P and de Valeriola, S (2019) Between DB and DC: optimal hybrid PAYG pension schemes. European Actuarial Journal 9, 463–482.CrossRefGoogle Scholar
Dickey, DA and Fuller, WA (1979) Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association 366, 427–431.Google Scholar
Heston, SL (1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options. The Review of Financial Studies 6, 327–343.CrossRefGoogle Scholar
Jabłonowski, J and Müller, C (2013) Three sides of a coin: long-term fiscal stability, adequacy and intergenerational redistribution of the reformed old-age pension system in Poland. Technical report, National Bank of Poland Working Paper No. 145.Google Scholar
Kendall, DG (1949) Stochastic processes and population growth. Journal of the Royal Statistical Society 11(2), 230–282.Google Scholar
Kwiatkowski, D, Phillips, PCB, Schmidt, PS and Shin, Y (1992) Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics 54, 159–178.CrossRefGoogle Scholar
Luciano, E and Vigna, E (2005) Non mean reverting affine processes for stochastic mortality. Technical report, ICER working papers.CrossRefGoogle Scholar
Musgrave, R (1981) A reappraisal of social security finance. In Social Security Financing 89. MIT, 109–20.Google Scholar
Proc. NDC Conference Sandham (2006) Pension Reform: Issues and Prospects for Non-Financial Defined Contribution (NDC) Schemes, Holzmann, R. and Palmer, P. (eds). Washington: World Bank.Google Scholar
Schokkaert, E, Devolder, P, Hindriks, J and Vandenbroucke, F (2018) Towards an equitable and sustainable points system. A proposal for pension reform in Belgium. Journal of Pension Economics and Finance 19, 49–79.CrossRefGoogle Scholar
Vasicek, O (1977) An equilibrium characterization of the term structure. Journal of Financial Economics 5, 177–188.CrossRefGoogle Scholar
Zeddouk, F and Devolder, P (2018) Mean reversion in stochastic mortality: why and how? Technical report, ISBA working papers.Google Scholar