Optimal mix of funded and unfunded pension systems: the case of Luxembourg

Financing of the Luxembourg pension system is based on a pay-as-you-go (PAYG) system and hence on an inter-generational contract. As is the case for most other European countries, this system will be exposed to the effects of demographic ageing over the coming decades. The aim of this paper is to develop a model that allows to evaluate the efficiency of a diversified pension system financed partly by a pay-as-you-go scheme and partly by capitalisation. The efficiency is measured by the long term sustainability of the system. We compare the sustainability of our model to the one of a pure pay-as-you-go system