The optimal size of Japan's public pensions: An analysis considering the risks of longevity and volatility of return on assets |
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Authors: | Naomi Miyazato |
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Institution: | Nihon University College of Economics, 1-3-2 Misaki-cho, Chiyoda-ku, Tokyo 101-8360, Japan |
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Abstract: | There are two main pension systems: the Defined Benefit (DB) pension system and the Defined Contribution (DC) pension system. Each system has advantages and disadvantages. This paper investigates to what degree Japan should maintain a DB public pension system which offers the benefit of sharing risk and to what degree Japan must adopt a DC pension system to eliminate intergenerational imbalance. The risks of longevity and volatility of return on assets are incorporated into the simulation model. As a result of the simulation analysis, a replacement rate of 20–30% would be adequate for future generations if the expected return on assets and the wage growth rate are at the same level. Meanwhile, if the former is 2% points larger than the latter, a replacement rate of 0% or full-scale privatization would be desirable. |
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