Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financia
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Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system Pierre Devolder1 · Susanna Levantesi2
· Massimiliano Menzietti3
Accepted: 26 September 2020 © The Author(s) 2020
Abstract 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. Keywords Notional Defined Contribution pension systems · Automatic balance mechanisms · Social adequacy · Financial sustainability · Optimization
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Susanna Levantesi [email protected]
1
Université Catholique de Louvain (UCL), Louvain-La-Neuve, Belgium
2
Sapienza University of Rome, Viale Regina Elena 295-G, 00141 Rome, Italy
3
University of Calabria, Rende, Italy
123
Annals of Operations Research
1 Introduction Traditional pension schemes in social security usually combine a Defined Benefit structure (DB) with a pay-as-you-go mechanism (PAYG). This classical architecture aims at creating an intergenerational solidarity while guaranteeing a well-defined level of living standard for retirees. However, the aging phenomena, caused by a significant increase in longevity and a decrease in fertility, has deeply threatened these schemes. Therefore, many countries have adapted different reforms in order to restore the financial sustainability. Among these strategies, the ND
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