Introducing a Funding Component in a PAYG Pension System : A Cost-Benefit Analysis with an Application to Italy

Demographic and economic evolution show how many public pension systems in the last decades have been facing the problem of financial sustainability. Usually financed by PAYG mechanism, they need constant balance between the amount of contributions and payments at all times. In the medium run public pension schemes are affected by the current demographic structure; it is therefore necessary to plan ahead strategies that can limit the probability of default. The aim of this paper is to implement a model introducing a funded component in a full PAYG pension system and to evaluate the benefits of this introduction in terms of long run financial sustainability, by using the main sustainability indicators already known in the actuarial approach. Moreover, some indicators are introduced to measure the cost for the pension system, with applications to the Italian public pension system