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How to design efficient defined contribution pension systems?
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Defined contribution pension systems offer solutions to the problem of an ageing population, but they also present many challenges. The oldest of these, in Chile, is a relevant example.
Few subjects touch upon everyone’s lives and generate so much controversy as pension funds. Developed and developing nations alike have witnessed massive – and at times, violent – protests by the population that oppose changes to the system or want to fully replace the one in place.
Pension systems come in different varieties. Defined Benefit (DB) and Defined Contribution (DC) are the two extreme cases, and most systems in the world use one or another, or some type of hybridization between the two. The former, which is in place in countries like France and Brazil, fixes workers’ salaries after retirement. The latter, exemplified by Chile and the 401k accounts in the United States, sets the amount the workers must save every month, e.g., a fixed percentage of their salary. As population pyramids in the world change, it becomes harder to fund the retirement of an aging population, which is a key cause of the massive shift from DB to DC systems in the last decades. [...]
