Pension Prefunding, Ageing, and Demographic Uncertainty |
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Authors: | Jukka Lassila Tarmo Valkonen |
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Institution: | (1) The Research Institute of the Finnish Economy (ETLA), Lönnrotinkatu 4B, 00120 Helsinki, Finland |
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Abstract: | Pension prefunding can be used to smooth contribution rates in economies where ageing will increase pension expenditure. But how extensive should prefunding be in a defined benefit pension system when there is considerable uncertainty concerning future mortality, fertility, and migration? We study the prefunding rules in the Finnish earnings-related pension system with an OLG simulation model. The results show that increasing the degree of prefunding could yield a more even intergenerational outcome and make future generations' position better, but it is quite possible to overshoot and harm current generations too much. Making the degree of prefunding fertility-dependent appears to be a useful alternative. With declining fertility, current large cohorts would pay modestly increased contributions. The accumulated funds, however, will be huge in relation to the wage bills of smaller future cohorts. |
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Keywords: | pensions partial prefunding ageing demographic uncertainty |
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