Pension reform: key issues illustrated with an actuarial model

Abstract

The paper examines pension reforms under ageing. With stylised facts, ageing is traced to low fertility and increasing longevity. Given these persistent factors, pension systems must be reformed to avoid an unfair burden being left for future generations. The main results for reform blueprints are: In a Defined Benefit (DB) system, partial pre-funding is needed to achieve intergenerational fairness unless benefits are sufficiently reduced; partial privatisation is an option for the management of the accumulating funds.Transition from a DB to a Notional Defined Contribution (NDC) system is another reform option; it reduces the replacement rates to levels which match prescribed contribution rates; an NDC public pillar can be accompanied by a second pillar, managed by the private sector.An effective retirement age increase is necessary to moderate the increase in pension expenditure and to preserve adequate pension levels. Pension reforms have important effects on public finance target setting. The presentation is non-technical and does not require prior knowledge of pension reforms.pension reform, Defined Benefit (DB) system, Notional Defined Contribution system, pension expenditure, public finance, Oksanen