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An Investigation of the Pay-As-You-Go Financing Method Using a Contingency Fund and Optimal Control Techniques

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  • Steven Haberman
  • Alexandros Zimbidis

Abstract

In many countries, aging populations are expected to lead to substantial rises in the cost of public pension systems financed by the pay-as-you-go (PAYGO) method. These systems will need to be adapted to cope with these changes. This paper considers one approach to reform, described in the literature as “parametric” (see, e.g., Disney 2000), and develops a model for adapting the PAYGO method using a contingency fund and optimal control techniques. The solution of the original model is investigated within two different frameworks: a deterministic-continuous one and a stochastic-discrete one. Finally, a case study applied to Greece is discussed, leading to a potentially acceptable proposal of a smooth path for contribution rates and the age of eligibility for the normal retirement pension.

Suggested Citation

  • Steven Haberman & Alexandros Zimbidis, 2002. "An Investigation of the Pay-As-You-Go Financing Method Using a Contingency Fund and Optimal Control Techniques," North American Actuarial Journal, Taylor & Francis Journals, vol. 6(2), pages 60-75.
    • Handle: RePEc:taf:uaajxx:v:6:y:2002:i:2:p:60-75
    DOI: 10.1080/10920277.2002.10596044
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    Cited by:

    1. Oriol Roch & Manuela Bosch-Príncep & Isabel Morillo & Daniel Vilalta, 2017. "A Revision of the Revaluation Index of Spanish Pensions," Hacienda Pública Española / Review of Public Economics, IEF, vol. 222(3), pages 109-134, September.
    2. R. Melis & A. Trudda, 2014. "Mixed pension systems sustainability," Working Paper CRENoS 201413, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    3. Alonso-García, J. & Devolder, P., 2016. "Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 224-236.
    4. Xiaoyi Zhang & Junyi Guo, 2018. "The Role of Inflation-Indexed Bond in Optimal Management of Defined Contribution Pension Plan During the Decumulation Phase," Risks, MDPI, vol. 6(2), pages 1-16, March.
    5. Godínez-Olivares, Humberto & Boado-Penas, María del Carmen & Haberman, Steven, 2016. "Optimal strategies for pay-as-you-go pension finance: A sustainability framework," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 117-126.

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