A macromodel reveals the solvency of a pension system

A simulation study

Abstract

This paper presents a simple stochastic simulation model of the Finnish earnings-related pension system, TyEL. The model is based on the standard population projection of Statistics Finland and a timeseries of realized investment returns in 2002-2024. In a business-as-usual scenario, the pension funds will reach EUR 880 bn in 2063 after which they will decrease rapidly. The ruin probability of the system is very low until 2060. These results are subject to a number of assumptions regarding inflation, real GDP growth, and perhaps most importantly, demographics.