Stochastic Dominance of Pension Plans

We compare different possibilities to reform a funded pension plan, whose balance is threatened by a decrease in mortality rates. Since the plan is mandatory, the welfare of employees might be reduced if contributions increase or if the retirement age is raised. An empirical study of Israeli data shows that a reform which decreases the pension benefits is the optimal strategy, compared with the options of increasing the retirement age or increasing pension fund contributions. We also show that giving employees freedom to choose their retirement age and induced pension benefits is the optimal policy and increases the welfare of employees.