Faculty of Actuarial Science & Insurance Seminar with Severine Arnold, University of Lausanne
Public pension systems are usually financed on a Pay-As-You-Go (PAYG) basis where pensions for retirees are paid by the contributions of the working-age population. Their sustainability has been thoroughly studied in the literature with the aim to provide solutions against population ageing. For instance, Alonso-García et al. (2017) implement risk-sharing mechanisms that vary the contribution rate and pension indexation to restore the financial sustainability, while Arnold et al. (2016) suggest to use mortality credits to fund longevity risk. In practice, about half of the OECD countries have taken measures to improve the financial sustainability of their pension systems over the past few years (OECD 2015). However, these reforms may lead to substantial transfers from those with shorter lifespans to those that will live longer than the average, as they do not necessarily take the differences in mortality based on socio-economic classes into account. The contribution of our paper is twofold. First, we show that the current Defined Benefit (DB) and Notional Defined Contribution (NDC) schemes put the lower social economic classes at disadvantage compared to the actuarially fair pensions. In contrast to that, higher classes experience a gain.
This is due to the fact that mortality rates per socio-economic class are not considered by either scheme. Consequently, we propose a model that determines the optimal parameters for each scheme and class, in order to render the pensions fairer even when no socio-economic mortality differences are considered. These include, among others, the interest rates awarded and the accrual rates. Our methodology is applied to mortality and salary data on a socio-economic level from the French Office of Statistics.
Keywords: retirement age, pay-as-you-go, public pensions, fairness, optimal parameters
Cass Business School, 106 Bunhill Row
106 Bunhill Row, London EC1Y 8TZ, UK
Professor in Actuarial Science
University of Lausanne
Together with Corina Constantinescu (University of Liverpool, UK), she is currently organizing the fourth edition of the International School on Perspectives on Actuarial Risks in Talks of Young researchers (PARTY), to be held on April 14-19 2019 in Romania.
In addition to teaching and research, she was involved in social security projects with the International Labour Organization, is a member of the International Actuarial Association (IAA) Life Section Committee (and currently vice-chair), the IAA Mortality Working Group and the Social Security Sub-Committee of the AAE (Actuarial Association of Europe).