ABSTRACT
Since the publication of World Bank, the reform of public pension systems has come to the fore. At the beginning, the World Bank suggested the replacement of the dominant unfunded defined benefit (DB) public systems with dominantly funded defined contribution (DC) systems. Transforming a public DB pension system with weak incentives into an non-financial defined contribution (NDC), a country obtains a strong link between lifetime contributions and lifetime benefits, without prefunding the system. This chapter discusses a pitfall in the NDC and analyses the linear and general improvements, respectively. It presents various optimal solutions to the flexible retirement system. Considering linear and bilinear benefit-retirement age functions, one can obtain an optimal solution, where the redistribution is less severe than in the modified NDC. Introducing incentive compatibility conditions, it is possible to determine the neutral second-best solution, but it leads to excessively low retirement for the shorter lived.
