The Expectation for Pension Insurance in Funded Schemes: Theoretical Model and Global Implementation

Authors

  • Ishay Wolf Ono College, Tzahal St 104, Kiryat Ono, Israel
  • Lorena Caridad y Lopez del Rio Cordoba University, Av. de Medina Azahara, 5, 14071 Córdoba, Spain

DOI:

https://doi.org/10.36941/ajis-2021-0131

Keywords:

Defined Contribution (DC), Pay-As-You-Go (PAYG), Put Option, Social Security

Abstract

In this study, we derive the financial position of pension actors in the market during pension system transition toward more funded capitalized scheme, mainly via an option benefit model. This is enabled by not considering the economy as a single earning cohort. We analytically demonstrate a socio-economic anomaly in funded pension system, which is in favor of high earning cohorts on the expense of low earning cohorts. This anomaly is realized by lack of insurance and exposure to financial and systemic risks. Furthermore, the anomaly might lead to pension re-reform back to unfunded scheme, mostly due to political pressure. We find that minimum pension guarantee is a rebalance mechanism to this anomaly, which increases the probability to sustainable pension scheme. Specifically, we argue that implementing the guarantee with an intra-generational, risk-sharing mechanism is the most efficient way to reduce the effect of this abnormality. Moreover, we exhibit the convergence process toward implementing minimum pension guarantee in many countries, which have capitalized their pension systems during the last three decades, particularly among Latin America and Central East Europe (CEE) countries.

 

Received: 11 December 2020 / Accepted: 5 August 2021 / Published: 5 September 2021

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Published

05-09-2021

Issue

Section

Research Articles

How to Cite

The Expectation for Pension Insurance in Funded Schemes: Theoretical Model and Global Implementation. (2021). Academic Journal of Interdisciplinary Studies, 10(5), 161. https://doi.org/10.36941/ajis-2021-0131