Transforming public pensions: A mixed scheme with a credit granted by the state

TL;DR

This paper proposes a mixed pension scheme combining PAYG and funded contributions, aiming to enhance sustainability and individual gains amid demographic challenges.

Contribution

It introduces a novel mixed pension system integrating a state-backed credit and investment component to improve financial sustainability.

Findings

The mixed scheme improves pension system sustainability.

It provides individual benefits through investment gains.

The approach actively involves individuals in risk management.

Abstract

Birth rates have dramatically decreased and, with continuous improvements in life expectancy, pension expenditure is on an irreversibly increasing path. This will raise serious concerns for the sustainability of the public pension systems usually financed on a pay-as-you-go (PAYG) basis where current contributions cover current pension expenditure. With this in mind, the aim of this paper is to propose a mixed pension system that consists of a combination of a classical PAYG scheme and an increase of the contribution rate invested in a funding scheme. The investment of the funding part is designed so that the PAYG pension system is financially sustainable at a particular level of probability and at the same time provide some gains to individuals. In this sense, we make the individuals be an active part to face the demographic risks inherent in the PAYG and re-establish its financial sustainability.