The Challenges for Public Pension Schemes

With population ageing, life expectancy at retirement increases and the ratio of contributors to retirees decreases. To ensure solvency, defined benefit (DB) systems undergo continuous parametric reforms, including raising retirement age, whereas personal accounts, defined contribution (PA-DC) systems are endowed with automatic adjustments ensuring solvency in both their funded and pay-as-you-go (PAYG) versions, albeit at the cost of jeopardizing pension adequacy. Within financial defined contribution (FDC) and non-financial defined contribution (NDC) systems, retiring workers are given the free choice of either accepting lower benefits or maintaining benefit adequacy by postponing retirement. Moreover, following the logic of personal accounts workers can see contributions as mandatory savings rather than taxes on their labour services. The extent to which a costly transition from PAYG to fully funded systems can counteract the effects of population ageing is debatable.