The demographic phases and the almost ideal pension system (AIPS)

Abstract

PAYG (pay-as-you-go) pension systems are not necessarily second-best options. There is a class of them, labelled AIPS (almost ideal pension systems), immune from all the criticisms customarily addressed to PAYG and with a number of advantages: they implicitly encourage people to remain employed at least up to the standard retirement age; the relative weight of solidarity towards the poor and actuarial equity must be explicitly chosen in advance and can be preserved forever; payments always match revenues, etc. AIPS can take different forms, but two basic features characterise them: (1) relativity (the key dependent variables-e.g. age at retirement and pension benefits-are pegged to the proper exogenous variables-wages, employment, average length of life, etc.-and evolve smoothly with them) and (2) use of the ‘reference’ age structure, along with the actual one. An application to Italy, including a simulation for the next 90 years, illustrates the advantages of the proposed arrangement.