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Financial and demographic risks in PAYG pension funds

Author

Listed:
  • Roberta Melis

    (Dipartimento di Economia, Impresa e Regolamentazione, Università di Sassari - CRENoS)

  • Alessandro Trudda

    (Dipartimento di Economia, Impresa e Regolamentazione, Università di Sassari)

Abstract

The paper analyzes the financial sustainability of private pay-as-you-go pension funds, focusing on the particular demographic risks affecting these institutions. We propose a model to describe the evolution of these pension funds, including two stochastic variables: ”global asset return” and “new entrants variation rate”. The study analyzes the demographic variable “new entrants” and its impact on the future evolution of the fund, comparing it with that of the financial returns. The numerical applications, implemented on Italian pension funds, show that the rate of variation of new entrants has a higher influence on the evolution of the fund with respect to the global asset return, despite the considerable invested wealth. Some proposal are developed to face the demographic “risk of extinction” of the insured professional category.

Suggested Citation

  • Roberta Melis & Alessandro Trudda, 2012. "Financial and demographic risks in PAYG pension funds," Economics Bulletin, AccessEcon, vol. 32(2), pages 1320-1329.
    • Handle: RePEc:ebl:ecbull:eb-11-00678
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    References listed on IDEAS

    as
    1. Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters, in: Social Security Policy in a Changing Environment, pages 43-68, National Bureau of Economic Research, Inc.
    2. Jeffrey R. Brown & Jeffrey B. Liebman & David A. Wise, 2009. "Social Security Policy in a Changing Environment," NBER Books, National Bureau of Economic Research, Inc, number brow08-1.
    3. Sandro Gronchi & Sergio Nisticò, 2008. "Theoretical Foundations Of Pay‐As‐You‐Go Defined‐Contribution Pension Schemes," Metroeconomica, Wiley Blackwell, vol. 59(2), pages 131-159, May.
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    More about this item

    Keywords

    pension funds; PAYG system; demographic risk; stochastic new entrants;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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