Abstract The primary metric for the health of a liability-based plan (LBP) is the ratio of the LBP’s current assets to its present-valued liabilities. This ‘funded ratio’ cannot address some important financial factors, so we suggest three additional metrics of financial health, connected to the probability of fulfilling the plan’s liabilities. The first two metrics compare the current assets and, if desired, projected future contributions to those needed to attain either (1) a specified probability for meeting all the liabilities (SAM, the solvency assets multiple) or (2) specified probabilities for meeting each liability (FAM, the funded assets multiple). The third metric, the risk-free funded ratio (RFFR), uses the STRIPS (Separate Trading of Registered Interest and Principal of Securities) curve to determine the fraction of the liabilities that can be covered without risk. We implement these metrics, first using Monte Carlo simulation given a fixed investment portfolio strategy, and then using dynamic programming to optimize investment portfolio strategies that maximize SAM and FAM.
The Korean National Pension Fund is projected to be depleted within thirty years. This paper examines whether short-term economic fluctuations affect fund projections and whether raising the target return can delay fund depletion. Using Vector Auto-Regression analysis, we find that contributions and returns are highly responsive to short-run fluctuations. However, business cycle volatility has a limited effect on fund forecasts. Our simulations suggest that increasing expected returns by taking on more risk can help delay depletion, even when accounting for increased volatility.
This paper examines how choice architecture shapes retirement planning decisions in India's National Pension System (NPS) - "All Citizens Model". The study investigates whether enrolment decisions are driven by rational economic calculations or by the system's behavioural design. Using a qualitative approach, in-depth interviews with 15 NPS subscribers were analysed through reflexive thematic analysis via MAXQDA software. Tax incentives emerged as the dominant enrolment factor, followed by government backing, peer influence, expert management, simplified registration, and protected returns. NPS structural features operating through financial utility and trust-building mechanisms exert the strongest influence on participation. The findings confirm the effectiveness of socially oriented, expertise-based, and risk-calibrated approaches grounded in prospect theory and bounded rationality. Policymakers should integrate behavioural insights alongside traditional economic incentives in pension scheme design. This study contributes to behavioural pension economics by empirically evaluating retirement choice architecture within a major emerging market context.
This paper contributes to the literature on augmented wealth (the sum of public pension entitlements and net wealth) along three dimensions. First, it provides new country-specific estimates of augmented wealth for Austria in the year 2017 by combining data from the HFCS (Household Finance and Consumption Survey) and the social security registry. Second, it shows that the main results, which are based on statistical matching, are surprisingly similar to estimates that utilize direct survey responses or information on work history. This finding suggests that international comparisons might be possible even if the results are based on different methodologies. Third, the paper also contrasts the size and distribution of augmented wealth for Austria with comparable estimates for other countries. The household averages of the present value of pension entitlements and of private net wealth turn out to be similar (both amounting to around 250,000), which is in line with the results for other countries like Switzerland, Germany, and the US. Also, the reduction in the Gini coefficient due to the inclusion of pension entitlements (a decrease from 0.73 to 0.53) is similar for Austria in comparison to other countries.
Many countries have implemented a variety of pension reforms in response to the challenges posed by an aging population. These reforms typically involve a trade-off between 'refinancing' (i.e., increasing contributions) and 'retrenchment' (i.e., reducing benefits). The primary question addressed in this study is whether policymakers in the European Union (EU) possess the necessary capacity to sustain legislated pension reforms, particularly given the growing political influence of the elderly. To examine this issue, we develop a bargaining model designed to optimally allocate the economic burden of aging between successive cohorts of workers and retirees, incorporating retirement incentives. In a scenario where bargaining power remains constant, the optimal allocation rule dictates a fixed-contribution system, effectively shifting the full burden of aging onto the elderly. However, when bargaining power is allowed to fluctuate in response to changes in the relative size of the retiree population (i.e., the dependency rate), the optimal allocation rule involves a compromise between increasing contributions and reducing benefits. In the empirical analysis, we compare these theoretical optimal allocation rules with projections of pension benefit rates and dependency ratios from the 2021 Economic Policy Committee. By calculating the implicit bargaining power required to align projected pension benefits with the optimal sharing rule for each year, we demonstrate a growing divergence between projected pension benefits and the optimal levels in many EU countries, as demographic shifts progress. Furthermore, our findings indicate that for most countries, projected pension benefits are increasingly falling below optimal levels when bargaining power adjusts in accordance with population aging.
Following European pension reforms, the responsibility for old-age provision has increasingly shifted from the state to the individual. This study examines how behavioral norms and perceptions of parents' or grandparents' financial situation influence participation in the voluntary second pillar. Using survey data from two Italian provinces with high coverage of supplementary pension funds, the analysis shows that norms transmitted through family and friends strongly predict participation, whereas workplace norms matter only for women. Perceived financial hardship of older relatives increases both awareness of retirement planning and the likelihood of enrollment, underscoring the role of the social environment.
Demographic change is one of Germany's most pressing social and economic challenges. Using data from a representative telephone survey, we analyze how well informed respondents are about the magnitude of demographic change and what factors influence the accuracy of their beliefs. We find that respondents tend to overestimate the old-age dependency ratio when considering the current and long-term demographic situation separately. However, their beliefs regarding the change of the old-age dependency ratios over the considered period are not far from the projected change. A better understanding of the German statutory pension insurance plays an important role for more accurate beliefs.
Using Danish register data, we study whether individuals save enough to maintain almost all (90%) of their pre-retirement consumption. We find that 85 percent do, largely due to mandatory labour market pension contributions. The remaining 15 percent are less likely to have mandatory pension schemes and do not compensate for the lack thereof via voluntary private savings. However, mandatory contributions come at the cost of lower consumption and non-retirement savings during working years. Individuals experiencing the largest increases in mandatory pension contributions accumulate less non-retirement wealth and consume less before retirement compared to those with small increases.
The primary policy response to population aging in advanced economies has been to raise the mandatory retirement age. However, these policies have reignited calls for differentiated retirement ages that take into account variations in work intensity. This paper utilises microdata to examine the relevance and feasibility of this concept in Europe. It first quantifies career arduousness using SHARE wave 7 retrospective ISCO4-digit data on careers in combination with US O*NET working conditions data. Then, using SHARE follow-up data collecting (bad)health and death information about wave 7 respondents, it estimates (healthy) life expectancy by career arduousness decile, combining econometrics and life table methods. Findings reveal a life expectancy gap between the least and most arduous careers of 4to 4.2 years. Healthy life expectancy differences are slightly larger, ranging from 6.9 to 9.1 years. Also, women's healthy life expectancy seems to be somewhat more impacted by arduousness.
We estimate labor demand elasticities to predict the employment effects of an employer's contributory pillar in Chile's pension system. The Chilean system has been a model for reform in many countries worldwide. We find labor demand to be inelastic, with baseline estimates ranging from -0.27 to -0.91. We predict that the implementation of an employer contributory pillar with contribution rates of 1% increase would increase unemployment rates by 0.20 to 0.71 percentage points (pp) from a baseline unemployment of 6.51%. Our results show sizable differences in labor demand elasticities and employment impacts by industry and workforce characteristics. Simulations imply implementing a uniform employer contributory pillar would especially reduce employment for low-skilled workers and workers in industries where labor is easily substitutable.
Long-term projections are the bedrock of any analysis looking at the sustainability of public finances. This paper computes the changes in economic growth in individual European Union countries needed for government debt-to-GDP ratios to stay on their baseline trajectories (taken from the European Commission's Debt Sustainability Monitor 2023) under high life expectancy, low-fertility, low-migration, and high-migration scenarios. These scenarios are provided in the Commission's Ageing Report (2024). We find that deviations of migration from the baseline entail the largest effect on the required rate of economic growth. The effects of the low-fertility scenario are most pronounced in the very long run and sometimes exceed those of low migration. Our findings inform policymakers about the potential role of higher productivity growth in alleviating the public finance consequences of demographic shocks. The importance of higher productivity growth is increased by the fact that in some countries demographic projections tend to be optimistic.
We analyze the effects of different pay-as-you-go public pension systems on financial imbalance, rate of return, and inequality of heterogeneous generations in terms of gender and education. We include aspects that are relevant for developing countries such as labor informality and payment of an old-age and social benefit. We introduce a new mixed system that combines components of the defined benefit (DB) and the defined contribution (DC) systems. Results show the new mixed system represents a compromise between the DB and DC systems and that a scheme (inspired in the German system) exhibits the highest rates of return and horizontal equity.
We study the 2017 pension reform in Finland, raising the statutory retirement age of the studied cohorts from 63 to 63 years and 6 months. Using monthly-based register data and a differences-in-differences approach, we estimate the reform’s impact on retirement, employment, unemployment, disability, sickness, and inactivity. Results indicate a significant 19-percentage-point increase in employment between the old and new retirement ages, alongside notable rises in unemployment, inactivity, and disability. Largely – but not entirely – this stems from the persistence of the previous labor market state. Gender differences are not large, but the effects vary considerably across education, income, employment sector, and self-employment status.
This paper investigates a well-known downside protection strategy called the constant proportion portfolio insurance (CPPI) in defined contribution (DC) pension fund modeling. Under discrete time trading CPPI, an investor faces the risk of portfolio value hitting the floor which denotes the process of guaranteed portfolio values. In this paper, we question how to deal with so-called ‘gap risk’ which may appear due to uncontrollable events resulting in a sudden drop in the market. In the market model considered, the risky asset price and the labor income are assumed to be continuous-time stochastic processes, whereas trading is restricted to discrete-time. In this setting, an exotic option (namely, the ‘cushion option’) is proposed with the aim of reducing the risk that the portfolio value falls below the defined floor. We analyze the effectiveness of the proposed exotic option for a DC plan CPPI strategy through Monte Carlo simulations and sensitivity analyses with respect to the parameters reflecting different setups.
We investigate the direct effect of the oldest spouse’s statutory retirement age on the retirement behavior of couples. We find a positive direct effect of the statutory retirement age on the labor participation and hours worked of both partners. In particular, we find that younger partners decrease their participation by up to almost 2 percentage points once the oldest spouse reaches the statutory retirement age. Male younger partners are twice as responsive than women. The responsiveness is also about twice as strong in high-income households than in low-income households.
Abstract We estimate labor demand elasticities to predict the employment effects of an employer’s contributory pillar in Chile’s pension system. The Chilean system has been a model for reform in many countries worldwide. We find labor demand to be inelastic, with baseline estimates ranging from −0.27 to −0.91. We predict that the implementation of an employer contributory pillar with contribution rates of 1% increase would increase unemployment rates by 0.20 to 0.71 percentage points (pp) from a baseline unemployment of 6.51%. Our results show sizable differences in labor demand elasticities and employment impacts by industry and workforce characteristics. Simulations imply implementing a uniform employer contributory pillar would especially reduce employment for low-skilled workers and workers in industries where labor is easily substitutable.
Using household survey data linked to supervisory data of Dutch pension funds, we provide evidence of the increase in household savings caused by shocks to the financial position of pension funds. Our identification strategy exploits cross-sectional and time variations in pension funds’ funding ratios, which result from asset allocations and price corrections outside the control of fund members. The findings reveal that fluctuations in funding ratios significantly impact household savings, with a displacement effect above 40 percent. Lower funding ratios are associated with higher voluntary savings, driven primarily by members of pension funds with lower historical returns. Unlike earlier studies, this paper covers a long time span including three major economic crises, providing novel insights into the interaction between pension fund stability and individual saving behaviour.
