How can social security organizations optimise pension financing under a changing demography and a volatile economy? This is a question of paramount importance in many countries, where social security schemes providing substantial benefits to retirees and financed on a pay-as-you-go (PAYG) basis are confronted with population ageing. It is often stated in the on-going debate on the reform of national pension systems that private fully-funded schemes are more adapted to the "new environment" and that, therefore, the role of public schemes should be limited to alleviate poverty. The capacity of the schemes financed on a PAYG basis to cope with the increasing pension costs resulting from the ageing of the population is a major argument in favour of such structural reforms.

This paper attempts to throw some light on the debate by providing simulation results on the sensitivity of alternative financing methods to a changing demographic environment and a volatile economic environment. In other words, it is argued that the need for contribution rate stability should not be addressed considering the demographic environment only, but also taking into account elements of the economic environment such as interest rates, wages and prices which have a determinant impact on pension financing. The paper reviews the objectives pursued in the selection of a financing system and the determinants of contribution rates. Information on the demographic and the economic characteristics of different countries are discussed and used as inputs for actuarial simulations. These simulations demonstrate that different financing methods react differently to different demographic and economic scenarios and that, generally speaking, a proper mix of PAYG and funded systems should prove to be an optimal system. An important conclusion, based on classical portfolio analysis, is that partial funding may represent an optimal approach for maximizing the revenue of the scheme in the long run.