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Comparing the Robustness of PAYG Pension Schemes

This paper provides a framework for modelling defined benefit (DB) and defined contribution (DC) point schemes, which are both pay-as-you go (PAYG) financed. Most sustainability issues pertain to unfunded schemes. Sustainability is less an issue for funded defined contribution schemes as pensions are financed by the contributions and their returns on accumulated assets. In particular, in funded defined contribution schemes, individuals bear the different risks.

24. mai 2016

Two stylised PAYG pension schemes are modelled and simulated to compare their robustness to shocks. A stylised version of each scheme is developed, based on the same demographic developments (distribution of workers by age and revenue and distribution of survival rate by age). Notional defined contribution (NDC) schemes (as in Sweden and Italy) are not modelled, but their functioning is close to a point scheme with the difference that contributions are recorded in individual accounts.

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