Retirement Guarantees in Mandatory Defined Contribution Systems

Jan Walliser

Abstract —Most public pension systems, whether they are of the predominant pay-as-you-go defined benefit type or of the defined contribution type, include guarantees for retirement income. The guarantees come in different and distinct forms, with the two polar cases being the universal pension (such as in the United Kingdom and Argentina) and the topping-up to a minimum pension level (such as in Germany and Chile). The paper reviews the design of such guarantees in a large set of countries and discusses the economic rationale and incentive structure resulting from these designs. It also reviews past experience for a number of countries, paying particular attention to the importance of changes to these guarantees over time and inflation. Based on the analysis, the paper will draw conclusions as to whether these guarantees are an effective instrument to protect against low retirement income and evaluate advantages and disadvantages of different designs.