Pension prefunding, ageing, and demographic uncertainty

Pension prefunding can be used to smoothe contribution rates in economies where ageing will increase pension expenditure. But how extensive should prefunding be, in a defined benefit pension system, when there is considerable uncertainty concerning future mortality, fertility, and migration? We study the prefunding rules in the Finnish earnings-related pension system with an OLG simulation model. Increasing the degree of prefunding could yield a more even intergenerational outcome and make future generations’ position better, but it is quite possible to overshoot and harm current generations too much. Making the degree of prefunding fertility-dependent seems a useful alternative. With declining fertility, current large cohorts would pay modestly increased contributions. The accumulated funds, however, will be huge in relation to the wage bills of smaller future cohorts. – Pensions ; partial prefunding ; ageing ; demographic uncertainty