A two-component public pension system under demographic equilibrium: a substitution rate for benefit adequacy

In a previous paper we analyzed the impact of demographic equilibrium on a pay-as-you-go pension system. The present work aims to extend those results by detecting a flexible contribution rate in terms of pension benefit adequacy, i.e. in terms of substitution rate, that allows coping with the risk of a contributory pension system not suited to guarantee acceptable living standards. We build an econometric model to test the impact of a new Italian public pension system related to the Cazzola-Treu one. A mathematical/actuarial pension benefit framework is studied. It is based on some parameters variation in relation to a substitution rate fixed at a lower bound, upon the approval of suitable improvements of the proposed public pension system. Since such system is closely related to the one adopted in UK, our mathematical model might be adjusted to fit into the Anglo-Saxon law.