Jennifer Alonso-García, M. Carmen Boado-Penas, and Julia Eisenberg
Abstract: Pay-as-you-go (PAYG) pension schemes are heavily affected by demographic risks. To mitigate the financial burden, mixed pension schemes that combine elements of funding and PAYG have been proposed. In this paper, we introduce a mixed scheme framework designed for a shrinking working-age population given a specific level of pension expenditure. We evaluate its performance using both the one-year ruin probability and the Value at Risk of the accumulated deficits over time. We also examine the implications of guaranteeing a return of zero on the investments within the funding scheme. Furthermore, we explore the creation of a buffer fund that invests part of the capital in the financial markets, thereby alleviating the financial pressures of the PAYG part. Our findings indicate that, although the proposed mixed framework does not hedge against demographic risk, it enhances the financial health of the system, delaying the need for pension reforms as a result.
Keywords: public pensions, demographic risks, investment, sustainability, ruin probability, value-at-risk, investment
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