Time-consistent pension policy with minimum guarantee and sustainability constraint

TL;DR

This paper develops a dynamic model for pension policy that balances guarantees, sustainability, and fairness, considering demographic and financial risks, and computes optimal investment and pension strategies.

Contribution

It introduces a novel dynamic utility-based framework for optimizing pension policies under multiple complex constraints and risks.

Findings

Optimal investment/pension policies derived for general models.

Analysis of policies under dynamic power utility preferences.

Incorporates demographic and financial risks into pension planning.

Abstract

This paper proposes and investigates an optimal pair investment/pension policy for a pay-as-you-go (PAYG) pension scheme. The social planner can invest in a buffer fund in order to guarantee a minimal pension amount. The model aims at taking into account complex dynamic phenomena such as the demographic risk and its evolution over time, the time and age dependence of agents preferences, and financial risks. The preference criterion of the social planner is modeled by a consistent dynamic utility defined on a stochastic domain, which incorporates the heterogeneity of overlapping generations and its evolution over time. The preference criterion and the optimization problem also incorporate sustainability, adequacy and fairness constraints. The paper designs and solves the social planner's dynamic decision criterion, and computes the optimal investment/pension policy in a general framework. A detailed analysis for the case of dynamic power utilities is provided.