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Defined Benefit Pension Plans: Cost of Living Adjustments and Membership Heterogeneity

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Li_Sijia.pdf (1.02 MB)

Date

2021-01-06

Authors

Li, Sijia

Journal Title

Journal ISSN

Volume Title

Publisher

University of Waterloo

Abstract

In this paper we explore different structures for cost of living adjustments (COLA), based on Hardy et al. (2020)’s five significant criteria: affordability, sustainability, efficiency, adequacy, and fairness. Full COLA protects plan members’ real income after retirement but leads to high costs and solvency risks. A two-tier COLA method, as an alternative, moderates the risks and protects low-paid members’ benefits. We provide a new insight using a heterogeneous pension plan model, consisting of equal populations of blue-collar (lower-paid) and white-collar (higher-paid) members. We further modify the existing benefit structure of the heterogeneous plan to achieve a DB pension plan conforming to the five criteria.

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Keywords

Defined Benefit Pension Plan Pension, Benefit Structure, Cost of Living Adjustments, Heterogeneity

LC Keywords

Defined benefit pension plans, Cost-of-living adjustments

Citation

URI

http://hdl.handle.net/10012/16612

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Theses
Statistics and Actuarial Science