Economics

Investment risk-taking and benefit adequacy under automatic balancing mechanism in the Japanese public pension system

S. Kimura, T. Kitamura, et al.

Explore how investment risk-taking in Japan's public pension reserve funds can influence benefit adequacy and system sustainability! This insightful research by Shin Kimura, Tomoki Kitamura, and Kunio Nakashima delves into the effects of the automatic balancing mechanism introduced in 2004, revealing the delicate balance between risk and financial security.

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Playback language: English

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Abstract

This study investigates the impact of investment risk-taking in Japan's public pension reserve funds on benefit adequacy and system sustainability, considering the automatic balancing mechanism (ABM) introduced in 2004. Using a stochastic simulation model based on government verification programs, the study analyzes the replacement rate (RR) and reserve-to-expenditure ratio (RER) under varying stock weight (SW) in reserve fund investments. Results show that high-risk investments increase benefit risk due to ABM-induced benefit reductions during solvency recovery. Low-risk investments result in low and potentially inadequate benefits. Moderate risk-taking (25-75% SW) appears optimal. The study also examines dynamic investment strategies (portfolio insurance and contrarian strategies) and the potential government burden from reserve fund depletion.

Publisher

Humanities and Social Sciences Communications

Published On

Aug 10, 2023

Authors

Shin Kimura, Tomoki Kitamura, Kunio Nakashima

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