Skip to main content
×
×
Home

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

  • Manuel Ventura-Marco (a1) and Carlos Vidal-Meliá (a2)
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.

Copyright
Corresponding author
E-Mail: carlos.vidal@uv.es
References
Hide All
AAA (2005) A Guide to the Use of Stochastic Models in Analyzing Social Security. American Academy of Actuaries. Issue in Brief, October.
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.
Arthur, W.B. and McNicoll, G. (1978) Samuelson, population and intergenerational transfers. International Economic Review, 19 (1), 241246.
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.
Auerbach, A.J. and Lee, R.D. (2011) Welfare and generational equity in sustainable unfunded pension systems. Journal of Public Economics 95 (1–2), 1627.
Barr, N. and Diamond, P. (2010) Pension Reform: A Short Guide. New York: Oxford University Press.
Barr, N. and Diamond, P. (2011) Improving Sweden's Automatic Pension Adjustment Mechanism. IB# 1, Center for Retirement Research at Boston College, January.
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), 3162.
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), 105127.
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, 89134.
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.
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), 242247, DOI: 10.1080/13504851.2013.851767.
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.
Börsch-Supan, A.H. (2007) Rational pension reform. The Geneva Papers on Risk and Insurance - Issues and Practice, 32 (4), 430446.
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.
Buffin, K.G. (2007) Stochastic projection methods for social security systems. PBSS Colloquium, International Actuarial Association, Helsinki.
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.
DeWitt, L. (2010) The development of social security in America. Social Security Bulletin, 70 (3), 126.
Diamond, P. and Orszag, P.R. (2005) Saving social security. Journal of Economic Perspectives, 19 (2), 1132.
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.
Goss, S. (2010) The future financial status of the social security program. Social Security Bulletin, 70 (3), 111125.
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.html
Gronchi, S. and Nisticò, S. (2008) Theoretical foundations of pay-as-you-go defined-contribution pension schemes. Metroeconomica 59, 131159.
Holzmann, R. and Palmer, E. (2006) Pension Reform: Issues and Prospects for Notional Defined Contribution (NDC) Schemes. Washington, D.C.: World Bank
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.
IAA (2010) Stochastic modeling. theory and reality from an actuarial perspective. International Actuarial Association, Ottawa.
IAA (2012a) ISAP, valuation of social security programs, International Actuarial Association. Exposure draft, Ottawa.
IAA (2012b) Stochastic projections of the financial experience of social security programs: issues, limitations and alternatives, Social Security Committee of the IAA, November.
ISSA (2012) Social Security Programs Throughout the World. Social Security Administration (SSA) and the International Social Security Association (ISSA). http://www.socialsecurity.gov/policy
Iyer, S. (2008) Stochastic actuarial modelling of a defined-benefit social security pension scheme: An analytical approach. Annals of Actuarial Science, 3 (1–2), 127185.
Jackson, H.E. (2004) Accounting for social security and its reform. Harvard Journal of Legislation 59, winter.
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. 849. Washington, DC: National Academy Press.
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.
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), 11751189.
Lindbeck, A. and Persson, M. (2003) The gains from pension reform. Journal of Economic Literature, XLI (March), 74112.
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), 6674.
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.
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.
OECD (2012) OECD Pensions Outlook 2012, OECD Publishing. http://dx.doi.org/10.1787/9789264169401-en.
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.
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.
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), 127.
Rothgang, H. (2010) Social insurance for long-term care: an evaluation of the German model. Social Policy and Administration, 44 (4), 436460.
Settergren, O. (2001) The Automatic Balance Mechanism of the Swedish Pension System – a non-technical introduction. Wirtschaftspolitische Blätter, 4/2001, 339349.
Settergren, O. (2003) Financial and inter-generational balance? An introduction to how the Swedish Pension System manages conflicting ambitions, Scandinavian Insurance Quarterly, 2, 99114.
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.
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), 115138.
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.
Sunden, A. (2006) The Swedish experience with pension reform. Oxford Review of Economic Policy 22 (1), 133148.
The Swedish Pension System. Orange Annual Report 2012 (2013) Ed. Gudrun Ehnsson, Swedish Pensions Agency (Pensionsmyndigheten), Stockholm. http://www.pensionsmyndigheten.se/
Valdés-Prieto, S. (2005) Securitization of taxes implicit in PAYG pensions. Economic Policy, 20, 215265.
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.
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), 13031320.
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), 287317.
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.
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.
Williamson, J.B. (2004) Assessing the pension reform potential of a notional defined contribution pillar. International Social Security Review, 57 (1), 4764.
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. 106138. Oxford: Clarendon Press.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

ASTIN Bulletin: The Journal of the IAA
  • ISSN: 0515-0361
  • EISSN: 1783-1350
  • URL: /core/journals/astin-bulletin-journal-of-the-iaa
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords