Old-Age Pension Systems: Characterization and Comparability

Old-age pension systems can be classified according to three aspects: funded versus unfunded systems (pay-as-you-go), actuarial versus non-actuarial systems, and defined benefit (DB) versus defined contribution (DC) systems. Several European countries have (or had) public old-age pension schemes with defined benefits, financed by a pay-as-you-go (PAYGO) scheme, where old-age pensions are determined by a formula not related to actuarial principles. However, given the existence of several structural problems, such as the decrease in employment, ageing of the population and decline in fertility rates, these systems have reached their maturity, showing certain signs of difficulties as regards sustainability and/or the capacity to meet social goals. In this context, in order to guarantee the sustainability of the systems, some countries have introduced structural reforms in their pension system architecture adopting alternative solutions as regards the funding of the system and/or the calculation of the pension benefit value. This article intends to compare the main pension models, trying to identify, from a conceptual perspective, the advantages and disadvantages of each one of them, in order to identify how to better address common challenges in the EU with regard to the protection of old age citizens in a sustainable manner.