Political Stress and the Sustainability of Funded Pension Schemes: Introduction of a Financial Theory

Abstract

This study introduces multiplayer game in the modern pension market. Particularly, this study claims that low earners and high earners have different interests when playing in funded pension market scheme. This differentiating is enabled by avoiding the entire society as a single earning cohort. This study using financial position, demonstrates a socio-economic anomaly in the funded pension system, which is in favor of high-earning cohorts at the expense of low-earning cohorts. This anomaly is realized by a lack of insurance and exposure to financial and systemic risks. Furthermore, the anomaly could lead to a pension re-reform back to an unfunded scheme system, due mostly to political pressure. This study found that a minimum pension guarantee is a rebalance mechanism for this anomaly, which increases the probability of a sustainable pension scheme. Nowadays when countries try to balance between social expenses and awaking financial markets, one may find this theory highly relevant. It is obviously one of the cases where social targets meat financial equilibrium and here they are in the same side. Specifically, it is argued that implementing the guarantee with an intra-generational, risk-sharing mechanism is the most efficient way to reduce the effect of this abnormality.