Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC sy...

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Bibliographic Details
Published in:Annals of operations research Vol. 299; no. 1-2; pp. 765 - 795
Main Authors: Devolder, Pierre, Levantesi, Susanna, Menzietti, Massimiliano
Format: Journal Article
Language:English
Published: New York Springer US 01.04.2021
Springer
Springer Nature B.V
Subjects:
Adequacy
Analysis
Business and Management
Combinatorics
Comparative analysis
Defined contribution plans
Financial management
Operations research
Operations Research/Decision Theory
Optimization
Optimization techniques
Pensions
Retirement
S.I.: Recent Developments in Financial Modeling and Risk Management
Social security
Sustainability
Theory of Computation
Italy
Financial sustainability
Social adequacy
Notional Defined Contribution pension systems
Automatic balance mechanisms
Optimization
ISSN:0254-5330, 1572-9338
Online Access:Get full text
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Summary:Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical application we apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.
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ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-020-03819-x