Paper: arXiv 2605.12698

Authors: Jennifer Alonso-Garcia, Caroline Hillairet, Sarah Kaakai, Mohamed Mrad

Abstract

This paper investigates optimal investment and pension policies in a Pay-As-You-Go (PAYG) system supplemented by a buffer fund used as an intergenerational risk-sharing mechanism. The social planner’s preference criterion is represented by non-zero volatility forward Constant Relative Risk Aversion (CRRA) utilities, and explicitly accounts for both sustainability and adequacy constraints. The optimal policies are characterized in closed form, and an in-depth analysis of the impact of preference sensitivities on the pension scheme is conducted. A detailed numerical analysis is performed to evaluate the sustainability and benefit adequacy of this hybrid PAYG buffer fund arrangement under a range of demographic, financial, and macroeconomic scenarios.

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 4.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper relies heavily on advanced continuous-time stochastic control and forward performance processes to derive closed-form optimal investment policies. While it provides detailed numerical scenario analysis, it lacks deep empirical validation against historical datasets, placing it firmly in the theoretical/analytical domain.

Research Flowchart

  flowchart TD
    A[Research Goal: Optimize PAYG pension & buffer fund policy under aging demographics] --> B[Model Inputs: Demographic, financial & macroeconomic scenarios]
    B --> C[Methodology: Non-zero volatility forward CRRA utilities & Stochastic Control]
    C --> D[Computational Process: Derive closed-form solutions with sustainability & adequacy constraints]
    D --> E[Numerical Analysis: Evaluate hybrid PAYG buffer fund under various scenarios]
    E --> F[Outcomes: Optimal investment policies & proof of improved intergenerational risk-sharing]

Cited References (45)

  1. Dynamic asset allocation under inflation (2002)
  2. Discounting and intergenerational equity (2013)
  3. The asymptotic elasticity of utility functions and optimal investment in incomplete markets (1999)
  4. Maturity-independent risk measures (2010)
  5. Stationary ordinal utility and impatience (1960)
  6. Discounting, Morality, and Gaming (1999)
  7. Le taux d’actualisation contre le principe de pr 'e caution? L e \c c ons `a partir du cas des politiques climatiques (2004)
  8. Dynamic asset allocation with stochastic income and interest rates (2010)
and 37 more
  1. Implied stochastic volatility models (2021)
  2. On the Heston model with stochastic interest rates (2011)
  3. Can estimated risk and time preferences explain real-life financial choices? (2022)
  4. EUROPOP2023 - Population Projections at National Level (2022-2100) (2023) — link
  5. Structure of earnings survey 2018 (earn_ses18_an) - Annual earnings (2018) — link
  6. Eliciting risk and time preferences (2008)
  7. Time-consistent pension policy with minimum guarantee and sustainability constraint (2024)
  8. Optimal investment in defined contribution pension schemes with forward utility preferences — → 2303.08462
  9. Consistent utility of investment and consumption: a forward/backward SPDE viewpoint (2018)
  10. Optimal Asset Allocation under Forward Exponential Performance Criteria (2008)
  11. An Exact Connection between Two Solvable SDE s and a Nonlinear Utility Stochastic PDE (2013) — link
  12. Adequacy, fairness and sustainability of pay-as-you-go-pension-systems: defined benefit versus defined contribution (2018)
  13. Intergenerational risk sharing in pay-as-you-go pension schemes (2025)
  14. Assessing public pensions using risk measures: pay-as-you-go versus mixed schemes (2025)
  15. Optimal investment with intermediate consumption and random endowment (2017)
  16. Pensions at a Glance 2025: OECD and G20 Indicators, (2025) — link
  17. Optimal strategies for pay-as-you-go pension finance: A sustainability framework (2016)
  18. Continuous time model for notional defined contribution pension schemes: Liquidity and solvency (2019)
  19. Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model (2016)
  20. Adequacy, fairness and sustainability of pay-as-you-go-pension-systems: defined benefit versus defined contribution (2018) — link
  21. Stability of the utility maximization problem with random endowment in incomplete markets (2011)
  22. Optimal investment with undiversifiable income risk (1993)
  23. Consumption and Portfolio Policies With Incomplete Markets and Short-Sale Constraints: the Finite-Dimensional Case 1 (1991)
  24. Optimal consumption from investment and random endowment in incomplete semimartingale markets (2003)
  25. Optimization of consumption with labor income (1998)
  26. Optimal investment and consumption with labor income in incomplete markets (2020)
  27. Initial investment choice and optimal future allocations under time-monotone performance criteria (2011)
  28. An ergodic BSDE approach to forward entropic risk measures: representation and large-maturity behavior (2019)
  29. Predictable forward performance processes: Infrequent evaluation and applications to human-machine interactions (2023)
  30. Personalized robo-advising: Enhancing investment through client interaction (2022)
  31. Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences (2019)
  32. Dynamic preferences for popular investment strategies in pension funds (2016)
  33. Competition in fund management and forward relative performance criteria (2022)
  34. Time-consistent pension fund management in stochastically changing markets and evolving horizons (2025)
  35. Learning Dynamic Utility (2026)
  36. Forward indifference valuation of American options (2012)
  37. Ramsey rule with forward/backward utility for long-term yield curves modeling (2022)

1 of 45 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.