×

The impact of DC pension systems on population dynamics. (English) Zbl 1480.91228

Summary: This study investigates the risk inherent in defined contribution (DC) pension plans on an individual and aggregate basis, based on U.S. data. Our aim is to gain insight into the consequences of a DC pension scheme becoming the predominant pillar of retirement income for an entire society. Using the stochastic simulated output of a DC flexible age-of-retirement model, we first determine the optimal investment strategies. We then examine the demographic retirement dynamics of an entire population of DC pension plan participants.
We observe that even for the most risk-averse plan members there is a high level of uncertainty in an individual’s age at retirement. At the aggregate population level, we find that this uncertainty does not get dampened to any great extent by a diversification effect. Instead, the central role played by the market in determining retirement dates results in significant variation in the dependency ratio (the ratio of retirees to workers) over time. In addition, an attempt to ameliorate the outcome by introducing additional realistic features in the DC population modeling did little to dampen this volatility, which suggests that countries dominated by DC schemes of this type may, over time, be exposed to significant risk in the size of its labor force.

MSC:

91G05 Actuarial mathematics
91D20 Mathematical geography and demography
91G10 Portfolio theory
PDFBibTeX XMLCite
Full Text: DOI

References:

[1] Arias, Elizabeth. 2004. United States Life Tables, 2002. National Vital Statistics Reports, 53(6): 1-39.
[2] Arnold, R. Douglas, Graetz, Micheal J. and Munnell, Alicia H. 1998. Framing the Social Security Debate: Values, Politics, and Economics, Washington, DC: Brookings Institution Press for the National Academy of Social Insurance.
[3] Blake, David, Cairns, Andrew J. G. and Dowd, Kevin. 2001. Pensionmetrics: Stochastic Pension Plan Design and Value-at-Risk during the Accumulation Phase. Insurance: Mathematics and Economics, 29(2): 187-215. · Zbl 0989.62057 · doi:10.1016/S0167-6687(01)00082-8
[4] Bowers, Newton L. Jr., Gerber, Hans U., Hickman, James C., Jones, Donald A. and Nesbitt, Cecil J. 1997. Actuarial Mathematics , 2nd ed., Schaumburg, IL: Society of Actuaries. · Zbl 0634.62107
[5] Brothers, Linda S. 1998. How Do You Choose a Retirement Age? In Society of Actuaries Monograph, 1-24. Schaumburg, IL: Society of Actuaries. M-RS00-1
[6] Brown, Jeffrey R. and Warshawsky, Mark J. 2001. Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues Cambridge, MA National Bureau of Economic Research Working Paper 8064
[7] Brown, Robert L. 1997. In Defense of Pay-As-You-Go (PAYGO) Financing of Social Security. North American Actuarial Journal, 1(4): 1-20. · Zbl 1080.91567
[8] Brown, Robert L. 1999. Economic Security for an Aging Canadian Population, Society of Actuaries Monograph M-RS99-2, pp. 1-102. Schaumburg, IL: Society of Actuaries.
[9] Brown, Robert L., Damm, Robin and Sharara, Ishmael. 2001. A Macro-economic Indicator of Age at Retirement. North American Actuarial Journal, 5(2): 1-10. · Zbl 1083.62556
[10] Brown, Robert L. and Liu, Jianxun. 2001. The Shift to Defined Contribution Pension Plans: Why Did It Not Happen in Canada?. North American Actuarial Journal, 5(3): 65-77. · Zbl 1083.91530
[11] Cairns, Andrew J. G. 2004. Interest Rate Models: An Introduction, Princeton, NJ: Princeton University Press. · Zbl 1140.91039 · doi:10.1515/9780691187426
[12] Canadian Institute of Actuaries. 1996. Meeting the Retirement Income Needs of Coming Generations, Ottawa: Report of the Task Force on Pension Plan Coverage.
[13] Cogan, John F. and Mitchell, Olivia S. 2003. The Role of Economic Policy in Social Security Reform: Perspectives from the President’s Commission Cambridge, MA National Bureau of Economic Research Working Paper 9166
[14] Davidoff, Thomas, Brown, Jeffrey R. and Diamond, Peter A. 1998. Annuities and Individual Welfare. American Economic Review, 95(5): 1573-90.
[15] Disney, Richard, D’Ercole, Marco M. and Scherer, Peter. 1998. “Resources during Retirement”. In Maintaining Prosperity in an Ageing Society: The OECD Study on the Policy Implications of Ageing, Paris: Organisation for Economic Co-operative and Development Ageing. Working Paper AWP 4.3
[16] Gill, Indermit S., Packard, Truman G. and Yermo, Juan. 2004. Keeping the Promise of Social Security in Latin America, Palo Alto, CA: Stanford University Press for the World Bank. · doi:10.1596/0-8213-5817-0
[17] Gill, Indermit S. and Tatucu, Radu. 2005. Social Security Reforms in Latin America: What Can the U.S. Learn?, Boston, MA: American Economics Association 2006 Conference Paper.
[18] Greenan, Jennifer A. 2002. The Handbook of Canadian Pension and Benefit Plans , 12th ed., North York, Canada: CCH Canadian Limited.
[19] Lachance, Marie-Eve. 2003. Optimal Investment Behavior as Retirement Looms, Philadelphia: Working Paper, Wharton School, University of Pennsylvania.
[20] Mitchell, Olivia S. 1998. International Models for Pension Reform, Philadelphia: Wharton School, University of Pennsylvania. Pension Research Council Working Paper 98-5
[21] Ostaszewski, Kryzsztof M. 2001. Macroeconomic Aspects of Private Retirement Programs. North American Actuarial Journal, 5(3): 52-64. · Zbl 1083.91547
[22] Poterba, James M. 2004. The Impact of Population Ageing on Financial Markets Cambridge, MA National Bureau of Economic Research Working Paper 10851
[23] Poterba, James M., Venti, Steven F. and Wise, David A. 2000. Saver Behavior and 401(k) Retirement Wealth. American Economic Review, 90(2): 297-302.
[24] Poterba, James M., Venti, Steven F. and Wise, David A. 2005. Demographic Change, Retirement Saving, and Financial Market Returns: Part 1, Working Paper
[25] Simonovits, Andras. 2005. Social Security Reform in the US: Lessons from Hungary, Boston, MA: American Economics Association 2006 Conference Paper.
[26] Turner, Adair, Drake, Jeannie and Hills, John. 2005. A New Pension Settlement for the Twenty-first Century: The Second Report of the Pensions Commission, London: The Pension Commission.
[27] Turner, John A. and Watanabe, Noriyasu. 1995. Private Pension Policies in Industrialized Countries: A Comparative Analysis, Kalamazoo, MI: W. E. Upjohn Institute for Employment Research. · doi:10.17848/9780880995320
[28] Vasicek, Oldrich E. 1977. An Equilibrium Characterisation of the Term Structure. Journal of Financial Economics, 5(2): 177-88. · Zbl 1372.91113 · doi:10.1016/0304-405X(77)90016-2
[29] Wilkie, A. David. 1995. More on a Stochastic Investment Model for Actuarial Use. British Actuarial Journal, 1(5): 777-945.
[30] Wise, David A. 2003. The Economics of Aging. NBER Reporter, : 1-10. (summer 2003)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.