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  • Author or Editor: A. Simonovits x
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In a former paper (Simonovits, 1999), I have discussed the problems of the new Hungarian pension system verbally. In this paper I will present some new results obtained by others and myself with mathematical models, which are related to the Hungarian pension reform (see e.g. Palacios and Rocha, 1998). (1) How can one model a pension system with the life-cycle theory? (Of course, this is introduction rather than new result.) (2) How is the model of a funded system modified if volatility of yields and operating costs are taken into account? (3) What would the actuarially fair model be in an unfunded pension system with flexible age of retirement, and how much saving (and damage) is to be expected from replacing the indexation of pensions in progress to earnings by the combined indexation? (4) How is the efficiency of the pension system affected if the unfunded system is replaced by a partially or fully funded system?

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The partial privatisation of the US Social Security system was clearly the top economic policy priority for the Bush administration around 2003. While many famous economists, publicists and politicians support, others reject the partial privatisation of the Social Security system. Political opposition has defeated the Bush plan but the basic idea will resurface sooner or later. Until now, international comparisons have been quite infrequent, concentrated on few countries (Chile, Great Britain and Sweden) and left out similar reforms introduced in similar situations, like in Hungary, Poland and other excommunist countries. In an attempt to fill this gap, in this article I outline the lessons learnt from the Hungarian reform, which started in 1998. The conclusion is simple: such a reform is feasible but does not solve the problems of social security (like sustainability and equity).

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With flexible (variable) retirement every individual determines his optimal retirement age, depending on a common benefit-retirement age schedule and his life expectancy. The government maximises the average expected lifetime utility minus a scalar multiple of the variance of the lifetime pension balances to achieve harmony between the maximisation of welfare and the minimisation of redistribution. Since the government cannot identify types by life expectancy, it must take the individual incentive compatibility constraints into account. Second-best schedules strongly reduce the variances of benefits and of retirement ages of the so-called actuarially fair system, thus achieving higher social welfare and lower redistribution.

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