Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-23T14:50:55.294Z Has data issue: false hasContentIssue false
  • English
  • Français

AN ACTUARIAL BALANCE SHEET MODEL FOR DEFINED BENEFIT PAY-AS-YOU-GO PENSION SYSTEMS WITH DISABILITY AND RETIREMENT CONTINGENCIES

Published online by Cambridge University Press:  13 February 2014

Manuel Ventura-Marco  and
Carlos Vidal-Meliá
Manuel Ventura-Marco
Affiliation:
University of Valencia, Financial Economics and Actuarial Science, Valencia, Spain E-Mail: [email protected]
Carlos Vidal-Meliá*
Affiliation:
University of Valencia, Financial Economics and Actuarial Sciencies, Avenida de los Naranjos, s.n., Valencia, Spain
*
E-Mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we develop a theoretical basis for drawing up a “Swedish” type actuarial balance sheet for a defined benefit pay-as-you-go (DB PAYG) scheme with retirement and disability benefits. Our model enables us to obtain the system's expected average turnover duration, measure the scheme's solvency and explore the phenomenon identified as “pension reclassification”, a widespread practice that masks the system's real status unless further pension information becomes available. The model is clearly linked to actuarial practice in social security and gives partial support to the practical adaptation of Swedish methodology carried out by OSFI (2012) in applying the concept of the contribution asset to the Canadian Pension Plan (CPP) balance sheet, which includes disability and survivor benefits.

Keywords

Actuarial balancedisabilityretirementsolvencySwedentransparency
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 44 , Issue 2 , May 2014 , pp. 367 - 415
Copyright
Copyright © ASTIN Bulletin 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

AAA (2005) A Guide to the Use of Stochastic Models in Analyzing Social Security. American Academy of Actuaries. Issue in Brief, October.Google Scholar
Actuarial Affairs Division, Pension Bureau AAD. (2009) “Summary of the 2009 Actuarial Valuation of the Employees' Pension Insurance and the National Pension” Ministry of Health, Labour and Welfare. http://www.mhlw.go.jp/english/org/policy/p36-37a.html.Google Scholar
Arthur, W.B. and McNicoll, G. (1978) Samuelson, population and intergenerational transfers. International Economic Review, 19 (1), 241–246.CrossRefGoogle Scholar
Auerbach, A.J. and Lee, R.D. (2009) Notional defined contribution pension systems in a stochastic context: Design and stability. Chapter 2 in Social Security Policy in a Changing Environment (eds. Brown, J., Liebman, J. and Wise, D.). Chicago: University of Chicago Press.Google Scholar
Auerbach, A.J. and Lee, R.D. (2011) Welfare and generational equity in sustainable unfunded pension systems. Journal of Public Economics 95 (1–2), 16–27.Google Scholar
Barr, N. and Diamond, P. (2010) Pension Reform: A Short Guide. New York: Oxford University Press.Google Scholar
Barr, N. and Diamond, P. (2011) Improving Sweden's Automatic Pension Adjustment Mechanism. IB# 1, Center for Retirement Research at Boston College, January.Google Scholar
Billig, A. and Ménard, J.C. (2013) Actuarial balance sheets as a tool to assess the sustainability of social security pension systems. International Social Security Review, 66 (2), 31–62.Google Scholar
Boado-Penas, C., Domínguez-Fabián, I. and Vidal-Meliá, C. (2007) Notional Defined Contribution Accounts (NDCs): Solvency and risk, application to the case of Spain. International Social Security Review 60 (4), 105–127.Google Scholar
Boado-Penas, C, Valdés-Prieto, S. and Vidal-Meliá, C. (2008) An actuarial balance sheet for pay-as-you-go finance: Solvency indicators for Spain and Sweden. Fiscal Studies, 29, 89–134.Google Scholar
Boado-Penas, C. and Vidal-Meliá, C. (2012) The actuarial balance of the pay-as-you-go pension system: The Swedish NDC model versus the US DB model. In NDC Pension Schemes in a Changing Pension World (eds. Holzmann, R., Palmer, E. and Robalino, D.), Chapter 14, Volume 2. Washington, DC: World Bank.Google Scholar
Boado-Penas, C. and Vidal-Meliá, C. (2014) Nonfinancial defined contribution pension schemes: is a survivor dividend necessary to make the system balanced? Applied Economics Letters, 21 (4), 242–247, DOI: 10.1080/13504851.2013.851767.CrossRefGoogle Scholar
Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (BOT) (2013), 2012 Annual Report. Washington, D.C.: Government Printing Office. http://www.ssa.gov/oact/pubs.html.Google Scholar
Börsch-Supan, A.H. (2007) Rational pension reform. The Geneva Papers on Risk and Insurance - Issues and Practice, 32 (4), 430–446.Google Scholar
Buffin, K.G. (2002) Analysis of divergence characteristics of stochastic solvency ratios under the three official deterministic projection assumption sets for the US social security system. 37th Actuarial Research Conference, University of Waterloo.Google Scholar
Buffin, K.G. (2007) Stochastic projection methods for social security systems. PBSS Colloquium, International Actuarial Association, Helsinki.Google Scholar
Chłoń-Domińczak, A., Franco, D. and Palmer, E. (2012) The first wave of NDC – taking stock ten years plus down the road. In: NDC Pension Schemes in a Changing Pension World (eds. Holzmann, R., Palmer, E. and Robalino, D.), Chapter 2, Vol. 1. Washington, DC: World Bank.Google Scholar
DeWitt, L. (2010) The development of social security in America. Social Security Bulletin, 70 (3), 1–26.Google ScholarPubMed
Diamond, P. and Orszag, P.R. (2005) Saving social security. Journal of Economic Perspectives, 19 (2), 11–32.Google Scholar
Elo, K., Klaavo, T., Risku, I. and Sihvonen, H. (2010) Statutory Pensions in Finland. Long-term projections 2009. Reports 2010:6 Finnish Centre for Pensions. http://www.etk.fi/en/service/home/770/publications.Google Scholar
Goss, S. (2010) The future financial status of the social security program. Social Security Bulletin, 70 (3), 111–125.Google Scholar
Government Actuary's Quinquennial Review of the National Insurance Fund as at April 2005 GAD (2010) 2010 London. HMSO. http://www.gad.gov.uk/services/Social%20Security/UK_social_security.htmlGoogle Scholar
Gronchi, S. and Nisticò, S. (2008) Theoretical foundations of pay-as-you-go defined-contribution pension schemes. Metroeconomica 59, 131–159.Google Scholar
Holzmann, R. and Palmer, E. (2006) Pension Reform: Issues and Prospects for Notional Defined Contribution (NDC) Schemes. Washington, D.C.: World BankGoogle Scholar
Holzmann, R. and Palmer, E. (2012) NDC in the teens: Lessons and issues. In NDC Pension Schemes in a Changing Pension World (eds. Holzmann, R., Palmer, and Robalino, D.), Chapter 1, Volume 1: Progress, lessons, and implementation. Washington D.C.: The World Bank.Google Scholar
IAA (2010) Stochastic modeling. theory and reality from an actuarial perspective. International Actuarial Association, Ottawa.Google Scholar
IAA (2012a) ISAP, valuation of social security programs, International Actuarial Association. Exposure draft, Ottawa.Google Scholar
IAA (2012b) Stochastic projections of the financial experience of social security programs: issues, limitations and alternatives, Social Security Committee of the IAA, November.Google Scholar
ISSA (2012) Social Security Programs Throughout the World. Social Security Administration (SSA) and the International Social Security Association (ISSA). http://www.socialsecurity.gov/policyGoogle Scholar
Iyer, S. (2008) Stochastic actuarial modelling of a defined-benefit social security pension scheme: An analytical approach. Annals of Actuarial Science, 3 (1–2), 127–185.CrossRefGoogle Scholar
Jackson, H.E. (2004) Accounting for social security and its reform. Harvard Journal of Legislation 59, winter.Google Scholar
Lee, R. (1994) The formal demography of population aging, transfers, and the economic life cycle. In Demography of Aging (eds. Martin, L.G. and Preston, S.H.), pp. 8–49. Washington, DC: National Academy Press.Google Scholar
Lee, R. (2006) Discussion of “The rate of return of pay-as-you-go pension systems: A more exact consumption-loan model of interest. In Pension Reform: Issues and Prospects for Notional Defined Contribution (NDC) Schemes (eds. Holzmann, R. and Palmer, E.), Washington, DC: World Bank.Google Scholar
Lee, R. and Tuljapurkar, S. (1994) Stochastic population projections for the U.S.: Beyond high, medium and low. Journal of the American Statistical Association, 89 (428), 1175–1189.Google Scholar
Lindbeck, A. and Persson, M. (2003) The gains from pension reform. Journal of Economic Literature, XLI (March), 74–112.Google Scholar
Ménard, J. (2010) Measuring the sustainability of national social insurance plans: The case of the Canada Pension Plan. Rotman International Journal of Pension Management, 3 (2), 66–74.Google Scholar
Ménard, J.C., Billig, A. and Léger, F. (2012) Survey on actuarial and financial reporting for social security schemes and its legal implications: Summary of findings and conclusions. International Conference of Social Security Actuaries and Statisticians, Berlin, Germany, 30 May – 1 June 2012.Google Scholar
OECD (2011) Pensions at a Glance 2011: Retirement-income Systems in OECD and G20 Countries, OECD Publishing. http://dx.doi.org/10.1787/pension_glance-2011-en.Google Scholar
OECD (2012) OECD Pensions Outlook 2012, OECD Publishing. http://dx.doi.org/10.1787/9789264169401-en.CrossRefGoogle Scholar
OSFI (2010) Twenty-fifth actuarial report on the Canada Pension Plan as at 31 December 2009. Ottawa, Office of the Superintendent of Financial Institutions Canada – Office of the Chief Actuary.Google Scholar
OSFI (2012) Measuring the financial sustainability of the Canada Pension Plan (Actuarial study, No. 10). Ottawa, Office of the Superintendent of Financial Institutions Canada –Office of the Chief Actuary.Google Scholar
Regúlez-Castillo, M. and Vidal-Meliá, C. (2012) Individual information for pension contributors: Recommendations for Spain based on international experience. International Social Security Review, 65 (2), 1–27.Google Scholar
Rothgang, H. (2010) Social insurance for long-term care: an evaluation of the German model. Social Policy and Administration, 44 (4), 436–460.Google Scholar
Settergren, O. (2001) The Automatic Balance Mechanism of the Swedish Pension System – a non-technical introduction. Wirtschaftspolitische Blätter, 4/2001, 339–349.Google Scholar
Settergren, O. (2003) Financial and inter-generational balance? An introduction to how the Swedish Pension System manages conflicting ambitions, Scandinavian Insurance Quarterly, 2, 99–114.Google Scholar
Settergren, O. (2009) “Actuarial accounting – quantifying reasons for change in financial position of a pay-as-you-go pension plan”. Technical Seminar for Social Security Actuaries and Statisticians, Ottawa, Canada, 16–18 September 2009.Google Scholar
Settergren, O. and Mikula, B.D. (2005) The rate of return of pay-as-you-go pension systems: A more exact consumption-loan model of interest. The Journal of Pensions Economics and Finance, 4 (2), 115–138.Google Scholar
Settergren, O. and Mikula, B.D. (2007) Actuarial accounting – calculating intergenerationally fair and sustainable life-cycle contribution rates. In Mainstreaming Aging (eds. Marin, B. and Zaidi, A.). Ashgate: European Center Vienna.Google Scholar
Sunden, A. (2006) The Swedish experience with pension reform. Oxford Review of Economic Policy 22 (1), 133–148.Google Scholar
The Swedish Pension System. Orange Annual Report 2012 (2013) Ed. Gudrun Ehnsson, Swedish Pensions Agency (Pensionsmyndigheten), Stockholm. http://www.pensionsmyndigheten.se/Google Scholar
Valdés-Prieto, S. (2005) Securitization of taxes implicit in PAYG pensions. Economic Policy, 20, 215–265.CrossRefGoogle Scholar
Vidal-Meliá, C. (2013) An assessment of the 2011 Spanish Pension Reform using the Swedish system as a Benchmark. Journal of Pension Economics and Finance, Available on CJO 2013, DOI:10.1017/S1474747213000383.Google Scholar
Vidal-Meliá, C. and Boado-Penas, M.C. (2013) Compiling the actuarial balance for pay-as-you-go pension systems. Is it better to use the hidden asset or the contribution asset? Applied Economics, 45 (10), 1303–1320.Google Scholar
Vidal-Meliá, C., Boado-Penas, M.C. and Settergren, O. (2009) Automatic balance mechanisms in pay-as-you-go pension systems. The Geneva Papers on Risk and Insurance: Issues and Practice, 33 (4), 287–317.CrossRefGoogle Scholar
Vidal-Meliá, C., Boado-Penas, M.C. and Settergren, O. (2010) Instruments for improving the equity, transparency and solvency of pay-as-you-go pension systems: NDCs, ABs and ABMs. Chapter 18 in Pension Fund Risk Management. Financial and Actuarial Modelling (eds. Micocci, M., Gregoriou, G.N. and Masala, G.B.). New York: Chapman & Hall/CRC Finance Series.Google Scholar
Whitehouse, E.R. (2010) “Decomposing Notional Defined-Contribution Pensions: Experience of OECD Countries' Reforms”, OECD Social, Employment and Migration Working Papers, No. 109, OECD Publishing.Google Scholar
Williamson, J.B. (2004) Assessing the pension reform potential of a notional defined contribution pillar. International Social Security Review, 57 (1), 47–64.CrossRefGoogle Scholar
Willis, R. (1988) Life cycles, institutions and population growth: A theory of the equilibrium interest rate in an overlapping-generations model. In Economics of Changing Age Distributions in Developed Countries (eds. Lee, R.D., Arthur, W.B. and Rodgers, G.), pp. 106–138. Oxford: Clarendon Press.Google Scholar