Rethinking the Contribution-Benefit Linkage in Pay-As-You-Go Retirement Systems Based on Algerian Case

Abstract

In Pay-As-You-Go systems, retirement benefits result from the multiplication of the reference wage by the contribution duration by an annuity rate. This formulation can undergo some adjustments to ensure sustainability within a changing environment. In this paper, we showed that the current contribution-benefit linkage might generate a large gap between individuals in terms of profitability and thus in terms of wealth accumulation over long periods. Considering the possible career scenarios in the Algerian retirement system, we found that return rates vary from 9.6% to 13.2%. To reduce inequality, we propose a new retirement benefit formula partially based on the actuarial fairness principle. Keywords: retirement, PAYG, equality, IRR, scenario, Algeria.