2015
DOI: 10.1002/for.2351
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How to Finance Pensions: Optimal Strategies for Pay‐as‐You‐Go Pension Systems

Abstract: The aim of this paper was to design optimal strategies using nonlinear dynamic programming to guarantee the required level of liquidity in pay‐as‐you‐go pension systems through changes in the key variables of the system, such as the contribution rate, retirement age and/or indexation of pensions. These strategies, also known as automatic balancing mechanisms (ABMs), calculate the optimal path of these variables over time, managing fluctuations in longevity, fertility rates, salary growth or any other kind of u… Show more

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Cited by 27 publications
(15 citation statements)
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“…In particular, one cannot increase the retirement age or make possible changes in the relationship between unfunded and funded systems. The dynamics of the pension systems were considered by Godınez-Olivares et al (2016), among others, which proposes approaches to the calibration of the optimal values of payments, retirement ages and indexation of the payments for the PAYG system, taking into account life expectancy, birth rate and salary increases. Billig and Menard (2013) took into account not only demographic but also four macroeconomic and institutional factors, namely the ratio of the funded to the unfunded parts in the obligatory pension system.…”
Section: Literature Reviewmentioning
confidence: 99%
“…In particular, one cannot increase the retirement age or make possible changes in the relationship between unfunded and funded systems. The dynamics of the pension systems were considered by Godınez-Olivares et al (2016), among others, which proposes approaches to the calibration of the optimal values of payments, retirement ages and indexation of the payments for the PAYG system, taking into account life expectancy, birth rate and salary increases. Billig and Menard (2013) took into account not only demographic but also four macroeconomic and institutional factors, namely the ratio of the funded to the unfunded parts in the obligatory pension system.…”
Section: Literature Reviewmentioning
confidence: 99%
“…For example, Haberman and Zimbidis (2002) and Pantelous and Zimbidis (2008) are examples of works using optimal control methods to compute trajectories of key variables of a Social Security system. Recently, Godínez-Olivares et al (2015) introduced as a control variable the indexation of pensions jointly with the contribution rates and retirement ages in a dynamic programming setting. However, their framework is not suited to our particular problem, where revaluation only affects to surviving pensions and not to all pensions.…”
Section: The Dynamic Optimization Approachmentioning
confidence: 99%
“…The second main focus of this paper is to demonstrate the impact of these projections on various financial calculations, and we provide a number of ways of quantifying, both graphically and numerically, the model risk in such calculations. Moreover, we test how the temperature change affects insurance pricing and reserving, both of which are of paramount importance for the sustainability of the insurance industry, governmental authorities, decision makers, and policymakers (Godinez‐Olivares, Boado‐Penas, & Pantelous, ; Pantelous & Zimbidis, , ; Pantelous, Zimbidis, & Kalogeropoulos, ; Richards & Currie, ). Our results and conclusions are evaluated based on historical mortality data available for the UK from the Human Mortality Database.…”
Section: Introductionmentioning
confidence: 99%