0000000000114107
AUTHOR
María Del Carmen Boado-penas
Notes on Using the Hidden Asset or the Contribution Asset to Compile the Actuarial Balance for Pay-as-You-Go Pension Systems
The aim of this paper is twofold: to determine the connection between the “contribution asset” and the “hidden asset” and to discover whether using either of them to compile the actuarial balance in Swedish-type pay-as-you-go pension systems will provide a reliable solvency indicator. We develop an overlapping generations model and apply it to the defined benefit pay-as-you-go system, although it would be just as valid for NDC systems. On the theoretical side the main conclusion is that, despite their very different natures, in a simplified scenario the contribution asset and the hidden asset could coincide if r - the real rate of interest - is equal to the growth in the wage bill. On the a…
El balance actuarial del sistema de reparto. Modelo ‘sueco’ frente a modelo ‘EE.UU.’: posible aplicación al caso español
RESUMENEl objetivo de este trabajo es arrojar luz sobre los dos principales metodos que aplican las administraciones publicas de la Seguridad Social al formular el balance actuarial, realizando especial hincapie en sus enfoques metodologicos, aspectos actuariales aplicados y resultados mas recientes con el fin de identificar sus diferencias y similitudes mas notables. Asimismo, se intenta mostrar la conveniencia de incorporar, al sistema publico de pensiones espanol, la obligatoriedad de elaborar un balance actuarial anual para mejorar su transparencia, solvencia, y facilitar el trabajo de las comisiones habilitadas con la finalidad de establecer las lineas de actuacion y las reformas a int…
The Actuarial Balance Sheet for Pay-As-You-Go Finance: Solvency Indicators for Spain and Sweden
This paper provides the first estimate of the actuarial balance of the Spanish contributory pension system for the old-age contingency, based on official data. The main accounting entries are developed from the principles of double-entry bookkeeping. The novel entry in the balance sheet, entitled the ‘contribution asset’ or ‘hidden asset’, is at the centre of the theoretical discussion. A comparison between the official balance sheet for the Swedish notional account system and our balance sheet for the Spanish contributory pension system is also provided. The main finding is that the Spanish pension system has an insolvency rate of 31.4 per cent. The policy implication is that unless curren…
Automatic Balance Mechanisms in Pay-As-You-Go Pension Systems
This paper shows the usefulness of the automatic balance mechanisms (ABMs) and explores the issue of introducing an ABM into the Spanish public contributory retirement pension system. We define the concept of the automatic balance mechanism and carry out an analysis of those existing in Sweden, Canada, Germany, Japan and Finland. We also present an indicator of the Spanish system's solvency which emerges from the actuarial balance sheet, and simulate the effect that certain changes in the parameters of the present system would have on solvency, showing the direction that could be taken if the mechanism were to be introduced in Spain. The main conclusion reached is that, given the system's s…
Nonfinancial defined contribution pension schemes: is a survivor dividend necessary to make the system balanced?
The survivor dividend, at a specific age, is the portion of participants’ credited account balances that is distributed on a birth cohort basis from the account balances of participants who do not survive to retirement. This article develops a model to show whether it would be justified to include the survivor dividend in the calculation of affiliate pension balances. The main findings are that the survivor dividend has a strong financial basis which enables the macro contribution rate applied to be the same as the individual credited rate, and that including the survivor dividend in the calculation of the initial pension is not irrelevant because the initial pension could rise by up to 21.…
"Compiling the Actuarial Balance for Pay-As-You-Go Pension Systems. Is it better to use the Hidden Asset or the Contribution Asset?"
The aim of this paper is twofold: to establish the connection between the "contribution asset" (CA) and the "hidden asset" (HA) and to determine whether using either of them to compile the actuarial balance sheet in the pay-as-you-go (PAYG) pension system will provide a reliable solvency indicator. With these aims in mind, we develop a model based on those first put forward by Settergren and Mikula (2005) and Boado-Penas et al. (2008) to obtain the analytical properties of the CA and to confirm its soundness as a measure of the assets of a PAYG scheme. Our model also enables us to explore whether, and to what extent, the HA can be considered a second alternative measure of the assets for PA…
Notional defined contribution pension schemes: Why does only Sweden distribute the survivor dividend?
The aim of this paper is to analyse the role of the survivor dividend in notional defined contribution (NDC) pension schemes. At present, this feature can only be found in the Swedish defined contribution scheme. We develop a model that endorses the idea that the survivor dividend has a strong basis for enabling the NDC scheme to achieve financial equilibrium and that not including the dividend is a non-transparent way of compensating for increases in longevity and/or legacy costs from old pension systems. We also find that the average effect of the dividend remains unchanged for any constant annual rate of population growth, that contribu-tors who reach retirement age always get a higher r…
The actuarial balance of the pay-as-you-go pension system: "US" model versus "Swedish" model: Possible application in the case of Spain
Spanish Abstract: El objetivo de este trabajo es arrojar luz sobre los dos principales metodos que aplican las administraciones publicas de la Seguridad Social al formular el balance actuarial, realizando especial hincapie en sus enfoques metodologicos, aspectos actuariales aplicados y resultados mas recientes con el fin de identificar sus diferencias y similitudes mas notables. Asimismo, se intenta mostrar la conveniencia de incorporar, al sistema publico de pensiones espanol, la obligatoriedad de elaborar un balance actuarial anual para mejorar su transparencia, solvencia, y facilitar el trabajo de las comisiones habilitadas con la finalidad de establecer las lineas de actuacion y las ref…
Should a Survivorship Dividend Be Included in Notional Defined Contribution Accounts (NDCs)?
The aim of this paper is to analyse the role of the survivor dividend in notional defined contribution (NDC) pension schemes. With this aim in mind, we first extend the model developed by Boado-Penas & Vidal-Melia (2014) by allowing for changes in the growth of the active population. We then compute the effect of the survivor dividend on the relationship between the individual’s internal rate of return for contributors who reach retirement age and the system’s internal rate of return. Finally we develop the main entries to include on the system's actuarial balance sheet. The model endorses the idea that the survivor dividend has a strong basis for enabling the NDC scheme to achieve financia…
Notional defined contributions (NDC): Solvency and risk in Spain
The aim of this article is twofold: to demonstrate the actuarial imbalance in the Spanish pension system in its current form; and to measure the degree of aggregate economic risk to which pensioners are exposed when applying formulas for the calculation of retirement pensions based on notional accounts. The model used generates scenarios for various periods encompassing some 10,000 different permutations of the macroeconomic indices needed to calculate such parameters as initial pension, earnings replacement rate, or internal rate of return and value at risk. The findings are analysed both objectively and subjectively. The main conclusions are that if the projections for the macroeconomic i…
Models of the Actuarial Balance of the Pay-As-You-Go Pension System: A Review and Some Policy Recommendations
This paper reviews the two main methods used by government Social Security departments to draw up the socalled actuarial balance of the p ayasyougo pension system, focusing especially on results, methodology and actuarial issues. The specific models studied are those in the United States, Japan and Sweden, and their main differences and similarities are highlighted. The authors make some specific policy recommendations that would be of interest to public finance economists, social security actuaries and policy makers, and they suggest that international organizations (ISSA, the World Bank, the OECD and others interested in public pension reform) could be supportive in developing and enforci…