Benefit Adequacy in Funded Pension Systems: Micro-Simulation of the Israeli Pension Scheme

Abstract

Purpose: This paper aims to empirically examine the adequacy of the future benefits of the funded pension scheme. Design/methodology/approach: This study investigates a large real data sample from the largest pension fund in Israel and simulates expected benefits using a pension simulator. Findings: We found that even with relatively high market returns, the shift of pension provision from defined benefit (DB) to DC entails a significant shift of risk from capital to labor and might lead elderly participants to poverty during their retirement phase. We find Israel’s pension system to be a unique playground for exploring an almost pure defined contribution (DC) pension system with a continuous trend toward capitalization and liberalization. Practical implications: This paper details the need to implement risk-sharing mechanisms in funded schemes, which provide a risk cushion against market fluctuations and alleviate income inequality and poverty. Originality value: Due to the pandemic crisis in 2020, we also showed that the expected pension benefits were vulnerable to financial, career, and systemic shocks.