Retirement insurance

Question 1

An individual can transfer consumption over time only in two ways:

Answer 1

Store current production
Claim to future production

Question 2

2 methods of pensions

Answer 2

Funding (saving money and exchanging)
PAYG (promise to younger generation that they will be taken care of and financing elderly from current revenue)

Question 3

Describe funded pensions

Answer 3

Private companies
Contributions are invested to generate income (future pension = contribution + return)
Elderly constrained by past contributions and returns
Diversity of returns

Question 4

2 types of funded pension schemes.Describe them

Answer 4

Defined contribution schemes (contribution rate is fixed, pension is lump sum accumulutaion, all the risk falls on individual)
Defined benefit schemes (firm or industry level, firm promises payments at retirement and the size depends on wage and employment years, company takes the risk)

Question 5

Describe PAYG pension

Answer 5

Run by the state
Guaranteed by taxation (contributions)
Expenditure is covered from current revenue: income transfers
Relaxes the constraint that the benefits received by any generation must be matched by its former contributions.

Question 6

Advantages of PAYG pension

Answer 6

Minimizes isses to labour mobility
Pension rights can be build up quickly since pensions are paid not by one’s own previous contributions, but by those of the current workforce
Protects against inflation
Has greater returns

Question 7

Describe Notional defined Contribution pensions

Answer 7

In essence PAYG
Benefits are linked to paid contributions
Individual has an account with all the details of contributions and returns
Account virtual (individual does not have an account)
The government choose the rate of return based on economic factors

Question 8

How aggregate replacement ratio is calculated?

Answer 8

gross median pension income of 65-74 yo relative to income from work 50-59, excluding other social benefits

Question 9

Pension pillars

Answer 9

1- PAYG
2- occupational pensions
3 - voluntary funded DC system

Question 10

Decrease of labour force in comparison with aged population due to:

Answer 10

• Decrease in birth rates;
• Increase in life expectancy;
• Longer study period of younger generation;
• Decreasing retirement age,
• Emigration, etc.

Question 11

“Maturation” of PAYG schemes:

Answer 11

• More and more beneficiaries;
• Wide range of benefits, higher level of payments.

Question 12

How relevant are demographic changes to funded pension financing?

Answer 12

Fallacy of composition - asuumption that it is for all, however, it is only for some
For individuals, economic function of pensions is to transfer consumption over time
It is not possible for society as a whole: consumption of pensioners as a group is produced by next generation of workers

Question 13

What are efficiency arguments for state intervention?

Answer 13

Private insurance companies achieve results if certain conditions are met.
Rational, risk-averse people will only buy insurance as long as net costs does not exceed the value of certainty
Taking care of people (external costs arise if an individual
does not buy pension rights)
Assisting private firms

Question 14

Public versus private provision

Answer 14

• Apart from inflation no barriers to private provision;
• Inflation non-insurable (probability neither independent nor estimable);
• Inflation protection requires state subsidy (not necessarily state provision).