64 Ekonomický časopis, 66, 2018, č. 1, s. 64 – 80 Application of the Lifecycle Theory in Slovak Pension System 1 Matej BALCO – Ján ŠEBO – Michal MEŠŤAN – Ľubica ŠEBOVÁ* Abstract In the wake of population ageing and increasing public pension liabilities, many countries have reformed their pension systems, moving away (at least par- tially) from defined benefit (DB) pension schemes and towards defined contribution (DC) pension schemes. Slovakia’s reformed its pension system into two main pillars – I. pillar PAYG scheme and II. pillar DC scheme. Slovak pension reform brings up a lot of questions regarding the optimality of two main pillars pension system set up. In this paper, we seek to investigate the effects of different Slovak pension system set up alternatives and their implications on lifecycle savings and individual welfare using own stochastic life cycle model of partial equilibrium. Results could serve as a basis for further discussion on improving the legislature on parameters’ set-up of both pension pillars in Slovakia as well as abroad. Keywords: pension system, life cycle theory, retirement, individual welfare JEL Classification: D12, D14, D81, E21, G18 Introduction To undertake the task of analysing the Slovak pension system alternatives, we develop a stochastic lifecycle model with five income types of individuals (i.e., income quintiles with different wage-age profile based on the United States Census Bureau data of earnings related to education and calibrated to Slovak con- ditions) making optimal decisions about their consumption/savings to maximise * Matej BALCO – Ján ŠEBO – Michal MEŠŤAN – Ľubica ŠEBOVÁ, Matej Bel University in Banská Bystrica, Faculty of Economics, Department of Public Economics and Regional Devel- opment, Tajovského 10, 975 90 Banská Bystrica, Slovak Republic; e-mail: matej.balco@umb.sk; jan.sebo@umb.sk; michal.mestan@umb.sk; lubica.sebova@umb.sk. 1 This work was supported by: The Slovak Research and Development Agency under the contract No. APVV-0465-12. The Scientific Grant Agency of the Ministry of Education, science, research and sport of the Slovak Republic and the Slovak Academy of Sciences under the grant No. VEGA-1/0669/14. KEGA under the grant No. 007UMB-4/2014.