How to finance pensions: optimal strategies for pay-as-you-go pension systems

Humberto Godínez-Olivares, María Del Carmen Boado-Penas, Athanasios A. Pantelous

Research output: Contribution to journalArticleResearchpeer-review

18 Citations (Scopus)


The aim of this paper was to design optimal strategies using nonlinear dynamic programming to guarantee the required level of liquidity in pay-as-you-go pension systems through changes in the key variables of the system, such as the contribution rate, retirement age and/or indexation of pensions. These strategies, also known as automatic balancing mechanisms (ABMs), calculate the optimal path of these variables over time, managing fluctuations in longevity, fertility rates, salary growth or any other kind of uncertainty faced by the pension scheme without repeated legislative intervention. A numerical application of our model, which uses the projection of the population structure of two representative countries, illustrates the main findings of the paper.

Original languageEnglish
Pages (from-to)13-33
Number of pages21
JournalJournal of Forecasting
Issue number1
Publication statusPublished - Jan 2016
Externally publishedYes


  • financial equilibrium
  • optimization
  • pay-as-you-go
  • public pensions
  • risk

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