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Annuitisation and cross-subsidies in a two-tiered retirement saving system

Published online by Cambridge University Press:  26 August 2014

Benjamin Avanzi  and
Sachi Purcal
Benjamin Avanzi*
Affiliation:
School of Risk and Actuarial Studies, Australian School of Business, UNSW, Sydney, NSW, 2052, Australia Département de Mathématiques et de Statistique, Université de Montréal, Montréal, Québec, H3T 1J4, Canada
Sachi Purcal
Affiliation:
Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, NSW, 2109, Australia
*
*Correspondence to: Benjamin Avanzi, Université de Montréal, Département de mathématiques et de statistique, C.P 6128 Succursale Centre-Ville, Montréal, (QC) H3C 3J7, Canada. Tel +1 514 343 6695. Fax +1 514 343 5700. E-mail: avanzi@dms.umontreal.ca
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Abstract

We develop a generalisation of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings – mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier – investment returns and annuity prices – leading to possible cross-subsidisation between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, and obviate some of the investment risk and annuity price risk that retirees face.

We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.

Keywords

Retirement savingsPensionsRegulationAnnuitisation

JEL classification

E21: Consumption • Saving • Wealth G23: Non-bank Financial Institutions • Financial Instruments • Institutional Investors H55: Social Security and Public Pensions D81: Criteria for Decision-Making under Risk and Uncertainty D91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ J26: Retirement • Retirement Policies
Type
Papers
Information
Annals of Actuarial Science , Volume 8 , Issue 2 , September 2014 , pp. 234 - 252
Copyright
© Institute and Faculty of Actuaries 2014 

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