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Optimal Balance Between Funding and Payg Pensions: the Case of NDC Pensions

van Ewijk,Casper
; 
Meijdam,Lex
Abstract
The prospect of a persistent low interest environment has revived the debate on payg versus funding for pensions. This paper analyses the optimal balance between funded and payg from a portfolio perspective following the seminal contribution of Matsen-Thøgersen (2004). Whereas these authors focus on the trade-off between the gains of risk sharing and the cost of the transfer to the previous generation inherent to payg pensions, we make a careful distinction between efficiency and distributional aspects. This allows us to focus exclusively on efficiency when optimizing the balance between payg and funding. To do so, we specify a Notional Defined Contribution (NDC) system that allows for mutual risk sharing of financial and economic risks between generations. In general, we find larger optimal payg shares than Matsen and Thøgersen which are more in line with real world payg shares.
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CentER Discussion Paper Nr. 2025-012
Date
2025-09-15
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Publisher
CentER, Center for Economic Research
Collections
Tilburg University Research Output Collection
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Keywords
pension, payg, NDC, intergenerational risk sharing, H55 - Social Security and Public Pensions, G11 - Portfolio Choice ; Investment Decisions, G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors, SDG 1 - No Poverty
Citation
van Ewijk, C & Meijdam, L 2025 'Optimal Balance Between Funding and Payg Pensions: the Case of NDC Pensions' CentER Discussion Paper, vol. 2025-012, CentER, Center for Economic Research, Tilburg, pp. 1-23.
URI
https://hdl.handle.net/20.500.14602/103070
License
info:eu-repo/semantics/restrictedAccess
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