Microeconomic Optimization of Pension Insurance

The monograph Microeconomic Optimization of Pension Insurance examines the long-term sustainability and adequacy of pension systems from the perspective of individual economic motivation, on the premise that the stability of a pension system depends primarily on the incentives that shape individual decisions on work, saving and consumption over the life cycle. Unlike the prevailing macroeconomic approach, focused on the fiscal effects of parametric reforms, the analysis centres on the preferences of the individual, intertemporal choice and the lifetime budget constraint. The work covers the theoretical foundations and development of pension systems, including the Bismarckian and Beveridgean models, and a systematic account of defined-benefit, defined-contribution and notional defined-contribution schemes, as the basis for understanding the institutional framework that shapes incentives. In that context, the microeconomic modelling of pension systems is developed on Fisher’s two-period optimal consumption problem, the life-cycle model, dynamic optimization and the Cobb-Douglas utility function, from which an optimal general model of a pension system is derived. A separate part of the monograph is devoted to the microeconomic modelling of the pension system of Republika Srpska and measuring its deviation from that model. The analysis shows that excessive solidarity, social, war-related and political entitlements, several levels of the minimum pension and the absence of actuarial penalties for early retirement act as “automatic distorters” of the objective function and the intertemporal budget constraint, producing moral hazard and adverse selection. It is concluded that the notional defined-contribution system comes closest to the optimal microeconomic model, and policies are proposed for a transition to it: confining redistribution to risks inherent in pension insurance, introducing actuarial factors, curbing the grey economy, pro-natalist measures and productivity growth. The monograph is intended for students, researchers and practitioners in economics and social policy, as well as for decision-makers involved in pension system reform.