Risk Sharing Pension Plans: Sustainability, Affordability, Adequacy, and Fairness Final Report

  • Mary Hardy
  • David Saunders 
  • Xiaobai Zhu
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OVERVIEW:

Traditional final average salary defined benefit (DB) plans are declining, largely because of the volatility of costs. However, the defined contribution (DC) design has significant and important deficiencies, including uncertain and potentially inadequate retirement income. In this paper we adapt results from theoretical, stylized work on pension design, to explore a form of target benefit plan that allows for structured, transparent intergenerational risk sharing (IRS). We compare the IRS plan design with the traditional DB design, based on five broad areas of comparison: affordability (average cost), sustainability (volatility of costs), efficiency, adequacy of benefits, and fairness.