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Sustaining Algeria’s Retirement System in the Population Aging Context: Could a Contribution Cap Strategy Work?

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  • Farid Flici

    (Research Center in Applied Economics for Development—CREAD, Algiers 16011, Algeria)

  • Inmaculada Dominguez-Fabian

    (Department of Financial Economics and Accounting, Faculty of Business, University of Extremadura, 10071 Cáceres, Spain)

Abstract

Previous research predicts an increasing financial deficit in Algeria’s PAYG retirement system, mainly due to rapid population aging, and parametric adjustments will be insufficient to alleviate this imbalance. Mitigating the effects of population aging will necessitate further intervention. In this work, we analyze how capping contributed salaries can help to mitigate the effects of population aging on the retirement system. Under generous Pay-As-You-Go schemes, promised pension payouts far exceed contributions. Thus, restricting contributions is expected to reduce the burden of future benefits by accepting lower contributions today, while directing public subsidies to low-income individuals. We simulate the future evolution of the financial balance of Algeria’s retirement system under various contributable salary caps versus various scenarios of environmental evolution and potential parametric reform actions. The results demonstrated that a 40% cap, along with major parametric reforms and an ideal environment, would help achieve a cumulatively balanced system in the long run.

Suggested Citation

  • Farid Flici & Inmaculada Dominguez-Fabian, 2024. "Sustaining Algeria’s Retirement System in the Population Aging Context: Could a Contribution Cap Strategy Work?," Risks, MDPI, vol. 12(6), pages 1-11, June.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:6:p:96-:d:1414932
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    References listed on IDEAS

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    3. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303.
    4. András Simonovits, 2022. "Longevity gap and pension contribution cap," CERS-IE WORKING PAPERS 2209, Institute of Economics, Centre for Economic and Regional Studies.
    5. Michael Hurd & Pierre‐Carl Michaud & Susann Rohwedder, 2012. "The Displacement Effect of Public Pensions on the Accumulation of Financial Assets," Fiscal Studies, Institute for Fiscal Studies, vol. 33(1), pages 107-128, March.
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