Four Archetypal Pension Systems

The basic properties of pension systems are analysed by means of a 2-overlapping-generations model. Non-financial, pay-as-you-go (PAYG) systems are either ‘defined benefit’ (NDB), disbursing earnings-related pensions or defined contribution (NDC), computing pensions according to the logic of personal accounts. The former apply the equilibrium contribution rate to adapt contribution revenues to changes in the economic and demographic factors affecting pension expenditures; the latter adapt expenditures to revenues by crediting to personal accounts the sustainable rate of return equal to the growth rate of aggregate earnings. Financial, fully funded systems can also ensure that assets match liabilities, thus maintaining their ‘unit’ degree of funding by either adjusting the contribution rate (FDB) or by crediting the market interest rate to the personal accounts (FDC).