Pension Design and Longevity

Jovan Zamac, Uppsala University

This study compares alternative designs of an unfunded pension system. Convex combinations between a fixed contribution rate and a fixed benefit rate are considered. The objective is to maximize the expected ex-ante welfare under stochastic old age mortality. The aim is thus to find the optimal size and design of the unfunded pension system “behind the veil of ignorance.” The model is an overlapping generations model where the effects on factor prices, labor supply, and human capital are accounted for. An individual's decision to exit the labor force is endogenous, and depends on life expectancy, accumulated assets, and the pension design. The decision to enter the labor force is also endogenous and affected by expected working length and the pension design. Numerical methods are used to solve the model.