Reform of Public Pension Schemes: Actuarial Challenges around Automatic Adjustment Mechanisms

Reform of Public Pension Schemes: Actuarial Challenges around Automatic Adjustment Mechanisms

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The financial sustainability and the social adequacy of our public pension schemes (social security systems) are key concerns for the next decades in a lot of countries. On the demographic side, our populations are rapidly ageing, mainly due to the increasing longevity of the human being. On the financial and economic sides, many uncertainties affect long term development. Therefore, our classical public pension systems, based by essence on a long term horizon, have many difficulties and must undertake more or less important reforms. In the past, changes affecting the rules of social security systems were decided on a discretionary basis (for instance sudden change in the retirement age decided by a government). Another way to manage the volatility of external parameters is to introduce inside the schemes, automatic mechanisms in order to implement objectives rules, avoiding any manipulation or “pension populism” and smoothing the effects. These automatic adjustment mechanisms can affect various parameters of the scheme such as the retirement age, the level of pension, the contribution rate, the adaptation of existing pensions. We can think for instance at an automatic link between the retirement age and the evolution of life expectancy but a lot of other mechanisms can be considered, including Automatic Balance mechanisms or risk sharing between workers and retirees. The design of good or even optimal mechanisms is therefore a very important and interesting topic for our future, implying actuarial challenges but also ethical and legal concerns such as inter and intra generational solidarity.

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