Carlos Vidal-Meliá

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 systems 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 systems situation of (in)solvency, the introduction of an automatic mechanism is highly recommended in order to set the system on the road to long-term financial solvency, neutralise the effects of ageing, changes in socio-economic conditions and the continuing increase in longevity, and to reduce populism in pension policy.

Demand for life annuities from married couples with a bequest motive

This paper will try to explain the “annuities puzzle” in greater depth by introducing the bequest motive, both strategic and altruistic. It will try to determine whether this motive really is a relevant feature influencing the demand for lifetime annuities by married couples. With this aim in mind, we develop an optimization model of the utility provided by purchasing a lifetime annuity with contingent survivor benefit or a joint survivor life annuity. This will enable us to calculate equivalent wealth in various contexts: the possibility of access to actuarially fair annuity markets, the inclusion of so-called market imperfections, and the assumption that couples already have part of their wealth in pre-existing lifetime annuities. Results are presented for a model specification calibrated to Spain.

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 article 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 (AB) 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 PAYG schemes. The main theoretical finding is that, despite their very different natures, the HA and the CA may nearly coincide at the limit when the interest rate of the financial market approaches the growth of the covered wage bill from above, but the HA supplies a solvency indicator which is not always consistent with the systems financial health.

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 21.84%, depending on the mortality scenario used.

El balance actuarial del sistema de reparto. Modelo sueco frente a modelo EE.UU: posible aplicación al caso español

RESUMEN El objetivo de este trabajo es arrojar luz sobre los dos principales métodos que aplican las administraciones públicas de la Seguridad Social al formular el balance actuarial, realizando especial hincapié en sus enfoques metodológicos, aspectos actuariales aplicados y resultados más recientes con el fin de identificar sus diferencias y similitudes más notables. Asimismo, se intenta mostrar la conveniencia de incorporar, al sistema público de pensiones español, 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 líneas de actuación y las reformas a introducir en el sistema de pensiones contributivo español. Los autores sugieren que la obligación de formular anualmente el balance actuarial reportaría múltiples ventajas: obligaría a los políticos españoles a renunciar al ejercicio del populismo en pensiones, los cotizantes y pensionistas tendrían una estimación fundada de cuál podría ser el grado de cumplimiento de las promesas que se les realizan respecto al pago de sus pensiones y además, las propuestas de reformas podrían ser valoradas con mayor fiabilidad.

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 contributors who reach retirement age always get a higher return than the scheme does, and that population growth enables cohorts with more years of contributions to benefit to a greater extent from the dividend effect.

An Actuarial Balance Sheet Model for Defined Benefit Pay-As-You-Go Pension Systems with Disability and Retirement Contingencies

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 systems expected average turnover duration, measure the schemes solvency and explore the phenomenon identified as “pension reclassification†, a widespread practice that masks the systems 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.

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 indices used bear only a minimal resemblance to reality, the pension system will accumulate further financial imbalance in the future that will force it either to reduce initial pensions considerably or to make some radical adjustments to the parameters. In terms of risk, for beneficiaries with high risk aversion the preferred formulas would be those based on future variations in wages with a constant pension amount in real terms; on the other hand, those less averse to risk would prefer formulas that generate a smaller initial pension but one which grows in real terms with subsequent changes in wage levels.

Integrating Retirement and Permanent Disability in NDC Pension Schemes

In this article, we develop a theoretical basis for integrating retirement and permanent disability using a generic nonfinancial defined contribution framework. The methodology we use relies on a multistate overlapping generations model that includes the so-called survivor dividend. Currently, this feature can only be found in the Swedish defined contribution (DC) scheme. The results achieved in the numerical example we present endorse the fact that the model works well. Special attention is given to the assumptions made about mortality rates for disabled people and disability incidence rates, which largely determine the contribution rate assigned to disability. The model could be of interest to policymakers because, after some adaptations, it could be implemented without too much difficulty and would uncover the real cost of disability and minimize the risk of disability insurance being used as a vote-buying mechanism.

Individual information for pension contributors: Recommendations for Spain based on international experience

The aim of this article is to establish basic guidelines to support the possible design of an information letter to be sent to individuals who contribute to the Spanish state pension system, should a decision ever be taken to adopt such an instrument. Basing our work on international experience and published research in the field, we look into the concept of “individual pension information�? and identify its most relevant features. We then give detailed descriptions of two models for the provision of individual pension information (the United States and Sweden), looking in particular at how these are structured, what aspects could be improved and their limitations. Finally, we offer recommendations for the design of a model for Spain.