Munich Personal RePEc Archive

The financial consequences of the ’Women & Men 40’ pension scheme concept in pay-as-you-go pension systems

Mihalyi, Peter and Vincze, Laszlo (2015): The financial consequences of the ’Women & Men 40’ pension scheme concept in pay-as-you-go pension systems. Published in: Economy and Finance , Vol. 3, No. 1 (2016): pp. 3-24.

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Abstract

With the help of five models, this paper analyses pension systems in general and the direct financial effects of the retirement-age-reducing concept mentioned in the title. Th e first part assumes a financially unchanged environment, when earnings are permanent, there is no interest and everyone lives for a predetermined length of time (deterministic models). Taking into consideration actual mortality rates (stochastic model) we give an idealised description of the current pay-as-you-go pension system, which, however, does not significantly diff er from real life. Th e most important consequence of taking mortality into consideration is the life insurance effect. The contribution of individuals who deceased prior to reaching a pensionable age, will increase the sources for the pension of survivors. Every forint the survivors paid themselves is worth 1.5–2 times as much on account of this life-insurance effect. In the second part of the paper incomes are assumed to increase and interest also accounted for. Here we highlight the advantage of funded pension schemes in that for the same amount of pension they require a third to half of the pension insurance contributions of the pay-as-you-go pension system, because half to two-thirds of pension funding comes from the returns on invested payments. Analysis of this reveals the hidden state deficit inherent in the pay-as-you-go pension scheme, and the fact that every active employee pays the interests on it on a monthly basis when paying two to three times more in pension insurance contribution than would be necessary. The third part demonstrates that if both women and men were to retire after 40 years of employment, it would entail pensions cuts of 9–12% for females and males respectively or a general pension cut of 19% for both sexes on average, if the present balance of contributions and pension payments are to be kept in the future.

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