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

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

Funded-capitalized pension designs and the demand for minimum pension guarantee

Using funded and unfunded pillars, the optimal pension structure is estimated using an over-lapping generation model, calibrated to the average OECD countries. While simulating different pillar sizes, a socio-economic characteristic was revealed in which low-earning groups are prone to unexpected market risks than high-earning cohorts and support a larger contribution than better-off individuals. This led to high contribution rates for funded pillars and low contributions rates for social security pillars. This suboptimal allocation leads to inefficient hedging capability for the pension portfolio. An alternative is a minimum pension guarantee as an efficient system stabilizer as it rebalances the economic cost among different earning cohorts. However, the guarantee might be expensive to implement if not capitalized early in the working phases in an era of aging populations, low birth rates, and deep financial crisis.

The transition to a multi-pillar pension system: the inherent socio-economic anomaly

Purpose This paper aims to analytically show that in an over-lapping-generation (OLG) model, low earning cohorts bear unwanted risk and absorb higher economic cost than high earning cohorts do. Design/methodology/approach This paper aims to consider the individual's risk appetite, using a simple utility function, based on consumptions and discount rates in each period. This paper calibrates the model according to teh Israeli pension system as a representative of a small open developed organization for economic cooperation and development country. Israel is considered as unique case study in the pension landscape, as it implements almost pure defined contribution pension scheme with continuous trend of pension market capitalization (Giorno and Jacques, 2016). Hence, this study finds Israel suitable for examining the theoretical mix of pension scheme. That model enables exploring combined solutions for adequate old age benefits, involving the first and the second pension pillars, under fiscal constraints. Findings It comes out that for risk-averse individuals, the optimal degree of funding is negatively correlated to asset returns' volatility and positively correlated to earning decile level. The neglect of risk and individual's current earning level will thus overstate the contribution level and funded percentage from total contributions. Moreover, even in an economy with minimum government intervention, and highly developed private pension fund with high average of rate of return, the authors find it is optimal that the pension system contains a sizeable unfunded pillar. This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. Practical implications The model presented in this paper could be implemented in countries with mix pension systems, as an alternative to public social transfers or means tested, alleviating poverty and inequality in old age. Additionally, this model could raise the public awareness of the financial sustainability of the unfunded pay-as-you-go pillar to diversify financial risk in pension systems, especially for low earning cohort in society. Social implications One area of research that is particularly relevant in this context concerns the issue of alleviating poverty and income inequality. It is often stressed that the prevention of old age poverty is among the central targets of well-designed pension system (Holzmann and Hinz, 2005). The conceptualization of minimum pension guarantee used in this composition allows to clearly capturing the notion of such a poverty and social targets as an integral part of the pension system rolls. Originality/value This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. That comes to realize through the level of total contribution rates and funded share that are generally optimal for high earning cohorts but not for low earning cohorts. This paper identifies that the effect of anomaly is most significant in a market characterized with high income-inequality level. This paper finds that imposing intra-generational risk sharing instrument in the form of minimum pension guarantee can re-balance pension design among different earning cohorts. This solution demonstrates balancing effect on the entire economy.

FINANCIAL IMPERATIVES OF QUALITY OF LIFE OF THE POPULATION IN UKRAINE IN CONDITIONS OF INCLUSIVE ECONOMIC DEVELOPMENT

The main financial imperatives of the quality of life of the population in Ukraine are considered in the article. Different approaches to quality of life assessment are shown. The minimum state social standards - the subsistence level, the minimum wage and the minimum pension - were taken as financial imperatives for the study. It is proved that the official subsistence level is much lower than the actual one, so it does not allow to maintain life at a normal level, as well as to provide reliable social protection. The authors argue that it is necessary to reconsider the methodological approach to its definition. Most items in the approved consumer basket in Ukraine do not take into account the vital costs determined by modern realities. The dynamics of the minimum wage in Ukraine in 2010-2021 is presented. During this period, its annual growth on the average on 500 hryvnias is observed. It is noted that the growth rate of household income was higher than the growth rate of GDP, and this is contrary to basic economic patterns. During 2017-2021, it was possible to increase the size of the minimum wage in Ukraine, which became more than 2 times the subsistence level, but it remains 15 times lower than in developed countries. The authors concluded that the usual voluntary increase in the minimum wage will increase contributions to the state budget for some time, but this cannot be the only and permanent way to improve the quality of life and it does not affect all segments of the working population. The analysis of the minimum pension showed that it is currently equal to the subsistence level for disabled people, so it does not guarantee pensioners a normal quality of life, the minimum pension is 1.8 million pensioners, a quarter of Ukrainian pensioners (2.7 million) continue to work. The causal relationship between inclusive economic growth and improving the welfare of the population is shown. The leitmotif of the article is the idea that improving the quality of life of the population should not occur only in the plane of distributive relations. The authors substantiate that economic reforms should be carried out for the sake of increasing employment; the usual nominal increase in financial imperatives of quality of life will not lead to its significant improvement.

Evidence on Annuity Choices in Chile

This study analyzes the empirical determinants of the annuity choice using data on retirees from the Chilean labor market. We find that sales agents, knowledge about the pension system, and greater education will be associated with an increase in the annuitization probability. Also, we expect that people in poor health are less likely to annuitize, which is supportive of the traditional view of adverse selection in the annuity market. Finally, we analyze the effects on annuity choices of the introduction of a Minimum Pension Guarantee.