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A Simple Two Period Overlapping Generation (OLG) Model For Public Pension Scheme (PAYG)

Author

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  • Al-Hassan, Hassana
  • Devolder, Pierre

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Nayrko, Christiana
  • Nokoh, K. Sagary

Abstract

In this paper, we develop in a PAYG public pension system, various ways to share the longevity risk across generations of active affiliates and retirees. We consider a simplified two period Overlapping generation (OLG) model with three major groups: active workers, new retirees and existing retirees. Two levels of risk sharing are proposed; in a first step we develop the sharing between the contributors and the beneficiaries by proposing various designs of the plan, from Defined Benefit to Defined Contribution including hybrid solutions such as Musgrave plans. For this level, the driving force is the dependency ratio. In a second step we consider the sharing between the retirees themselves by considering two important degrees of freedom: the level of the first pension for the new retirees and the revaluation of existing pensions for the older retirees. Different strategies of risk sharing are presented in this framework. We illustrate the concepts by numerical illustrations based on deterministic and stochastic demographic models.

Suggested Citation

  • Al-Hassan, Hassana & Devolder, Pierre & Nayrko, Christiana & Nokoh, K. Sagary, 2023. "A Simple Two Period Overlapping Generation (OLG) Model For Public Pension Scheme (PAYG)," LIDAM Discussion Papers ISBA 2023033, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvad:2023033
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    References listed on IDEAS

    as
    1. Giam Cipriani, 2014. "Population aging and PAYG pensions in the OLG model," Journal of Population Economics, Springer;European Society for Population Economics, vol. 27(1), pages 251-256, January.
    2. Beatriz Rosado-Cebrian & Marta Peris-Ortiz & Carlos Rueda-Armengot, 2020. "Adequacy of Public Pension Systems," Springer Books, in: Marta Peris-Ortiz & José Álvarez-García & Inmaculada Domínguez-Fabián & Pierre Devolder (ed.), Economic Challenges of Pension Systems, chapter 0, pages 173-191, Springer.
    3. Buyse, Tim & Heylen, Freddy & Van De Kerckhove, Renaat, 2017. "Pension reform in an OLG model with heterogeneous abilities," Journal of Pension Economics and Finance, Cambridge University Press, vol. 16(2), pages 144-172, April.
    4. Meijdam, Lex & Verbon, Harrie A A, 1997. "Aging and Public Pensions in an Overlapping-Generations Model," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 29-42, January.
    5. Eisei Ohtaki, 2011. "A note on the existence of monetary equilibrium in a stochastic OLG model with a finite state space," Economics Bulletin, AccessEcon, vol. 31(1), pages 485-492.
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    Keywords

    PAYG ; Dependency Ratio ; DB ; DC ; Musgrave ; Risk sharing ; Revaluation;
    All these keywords.

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