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.

Shin Kimura, Tomoki Kitamura, Kunio Nakashima