Funded Pension Schemes in Aging Societies: A Pure Economic Argument?

Abstract

This study enables different angel to explore central planners’ considerations regarding pension systems in a modern western market with aging influence. In particular, considerable weight has been given to the effect of the crisis due to the pandemic and frequent market turmoil. This study expands the number of players analyzed in the field and takes into consideration different interests among the current and future generations. In addition, we allow differentiation among earning cohorts. By using the overlapping generation model and Monte Carlo simulations, we find that in a wide macroeconomic range, pension equilibrium surprisingly stands with unfunded pension schemes despite the heavy aging influence. Contrary to the classic economic arguments by the World Bank and IMF that were widespread during the 1980s and 1990s, the choice of a pension system is much more complex. We find that the central planner must take into account not only the aging rhythm and market yield but also other parameters, such as the current and future utility perspective, the government’s debt price, GDP per capita growth rate, risk aversion, and the possibility of market turmoil.