THE SPANISH PENSION SYSTEM: ISSUES OF INTRODUCING NOTIONAL DEFINED CONTRIBUTION ACCOUNTS

There are two aims to this paper: firstly, to provide an objective technical assessment of the current situation of the contributory pension system in Spain and its prospects for the future, and secondly, to look at the issues surrounding the introduction of a system of notional defined contribution accounts. To this end we explain the basic elements upon which the current system is based and show its main indicators, then set out some of its fundamental problems. Following this we look at the most relevant research work, where forecasts can be found that will give us a clear idea of the system's financial sustainability. Finally we put forward an argument as to why a notional accounts system could be a valid alternative for reforming the current system, and suggest which formula or group of formulas would best fit the profile of contributor-beneficiary risk and what the transition process would beRetirement, Pay-as-you-go, Internal Rate of Return (IRR), Financial sustainability.

Individual pension information: Recommendations for the case of Spain based on the experiences of other countries

The aim of this paper is to establish some basic guidelines to help draft the information letter sent to individual contributors should it be decided to use this model in the Spanish public pension system. With this end in mind and basing our work on the experiences of the most advanced countries in the field and the pioneering papers by Jackson (2005), Larsson et al. (2008) and Sunden (2009), we look into the concept of “individual pension information” and identify its most relevant characteristics. We then give a detailed description of two models, those in the United States and Sweden, and in particular look at how they are structured, what aspects could be improved and what their limitations are. Finally we make some recommendations of special interest for designing the model for Spain

ASSESSING ADMINISTRATION CHARGES FOR THE AFFILIATE IN INDIVIDUAL ACCOUNT SYSTEMS

In any pension system based on capitalization, affiliates have to cover certain explicit costs which in a pay-as-you-go system would be implicit. In this paper we set out a model based on Whitehouse (2000) and Diamond (1999) to enable the explicit costs borne by the affiliate both during his working life and his retirement period to be assessed. It also shows the relationships between the different ways of measuring the costs that make up the total price finally paid by the contributors. Included in the model is the notable effect that some factors -such as gaps in contribution profiles, account transfers and changes in salary profiles- have on projecting the costs borne by the affiliates. Finally we carry out an international comparison of administration costs from the point of view of the affiliate, focusing special attention on the countries of Latin America and Spain. This has a double objective: 1.- To test the validity of criticisms made by some researchers as to whether the new capitalization systems introduced in Latin America are too expensive to run for the affiliates. 2.- To serve as a reference for the individual pension scheme system in Spain. En un sistema de pensiones basado en la capitalización los afiliados deben hacer frentea unos costes explícitos que en el sistema de reparto son implícitos. En este trabajo sedesarrolla un modelo, basado en Whitehouse (2000) y Diamond (1999), que permite evaluarlas comisiones explícitas que soporta el afiliado, tanto durante la vida laboral como durante laetapa de jubilación y que, además, muestra la relación entre las diferentes medidas de loscostes que integran el precio total que finalmente pagan los cotizantes. En el modelo seintroduce el efecto de algunos aspectos que tienen una repercusión muy importante en laproyección de los costes que soportan los afiliados: ¿vacíos¿ en los perfiles de aportación,efecto de los traspasos de fondos y cambio en los perfiles de salarios. Por último, se realizauna comparación internacional de los costes de administración desde la óptica de los afiliadoscon un doble objetivo:1.-Contrastar la validez de la crítica realizada por algunos investigadores a los nuevossistemas de capitalización individual implantados en América Latina, en el sentido de que sonexcesivamente caros de gestionar para los afiliados.2.-Servir de referencia para el sistema de planes de pensiones individuales en España.Capitalización, Costes de Administración, Fondo de pensiones, América Latina. Capitalization, Administration Costs, Pension Funds, Latin America

How do unisex life care annuities embedded in a pay-as-you-go retirement system affect gender redistribution?

This paper aims to assess gender redistribution when using unisex conversion factors to compute the initial benefit of life care annuities (LCAs) embedded in a pay-as-you-go (PAYG) pension system. We use a method based on actuarial factors to disentangle the hidden redistribution of LCAs with graded benefits. The value of the actuarial factor relies on a multistate framework in which transitions are modeled from the initial health state to the absorbing state. According to our calculations for Australia and the US, the amount of gender redistribution is by no means irrelevant. In spite of the very different biometric data, the results are surprisingly similar for both countries. Risk equalization based on the “equal treatment” of men and women may not be fair, given that age, gender and health state are very significant risk factors in computing the initial benefit in a system covering retirement and long-term care

Does the pension system’s income statement really matter? A proposal for an NDC scheme with disability and minimum pension benefits

This paper develops an accounting model for monitoring the solvency of a notional defined contribution (NDC) pension scheme with disability and minimum pension benefits. Using the annual report of the Swedish pension system as a benchmark, the “Swedish” actuarial balance is extended by adding an income statement fully explaining the reasons behind the changes in the system’s solvency by type of benefit. In line with the reference model, assets and liabilities are measured at present value at each reporting date, and in each period, included as income or expenses on the Income statement. This accounting framework integrates both contributory and social aspects of public pensions and discloses the real cost of the disability contingency and the redistribution through minimum pensions. Apart from Sweden, this proposal could be especially interesting for improving the reporting of public pensions in countries such as Poland, Italy, Latvia and Norway

El balance actuarial como indicador de la solvencia del sistema de reparto

The aim of this work is twofold: on the one hand, to demonstrate the utility of the actuarial balance as an element of transparency, an indicator of the solvency, sustainability and financial solidity of the pay-as-you-go system and a tool capable of providing positive incentives to improve the financial management of the system, eliminating or at least reducing the traditional divergence between the planning horizon of the politicians and that of the system itself; and on the other, to make the first estimates of the actuarial balance of the Spanish contributory pension system for the old age contingency, based on official figures. To this end, we analytically explain the novel entry in the balance sheet called the ¿Contribution Asset¿, and compare it to the ¿Hidden Asset¿. We also provide a comparison between the official actuarial balance for the Swedish notional account system and the Spanish balance. The main finding is that the Spanish pension system shows a 31.4% insolvency ratio for 2006. Moreover, a comparison of the consecutive balance sheets for 2001-06 shows that the system has a structural actuarial disequilibrium, which means that the degree of insolvency is growing over time even though the cash-flow outcome has improved over the same period. The absence of a balance sheet in this specific case produces a ¿mirage effect¿ by hiding the presence of a capital deficit, relativising future cash deficits and, more importantly, not taking steps to reverse this trend, restore solvency and eliminate the ¿losses¿ or ¿increases¿ in the accumulated deficit which accrue every year that passes without reform. Two main suggestions for economic policy spring from this paper: the need to compile an official actuarial balance sheet and actuarial annual results so that society may be made aware of the real situation of the Spanish pension system, and the advisability of applying an automatic balancing mechanism which, would predetermine the combinations of gradual parametric adjustments needed to reverse the negative trend and set the Spanish pension system on the road to solvency in the long run. El objetivo de este trabajo es doble, por un lado mostrar la utilidad del balance actuarial como elemento de transparencia, indicador de la solvencia, sostenibilidad o solidez financiera del sistema de reparto e instrumento que es capaz de proporcionar incentivos positivos para la mejora de la gestión financiera al minimizar la tradicional divergencia entre el horizonte de planificación de los políticos y el del propio sistema en sí; por el otro, realizar la primera estimación, a partir de datos oficiales, del balance y de resultado actuarial del sistema español de pensiones contributivas de jubilación. Con el fin de alcanzar los objetivos propuestos, se desarrolla analíticamente el elemento más novedoso del balance actuarial, el denominado "Activo por cotizaciones", y éste se contrasta con el "Activo Oculto", también se realiza la estimación del balance actuarial del sistema público de pensiones español y se compara el ratio de solvencia que deriva del balance español con el del sistema sueco de pensiones. El indicador de solvencia del sistema español está lejos de ser considerado razonablemente solvente, ya que, para el año 2006, un 31,4% del pasivo actuarial no tiene cobertura. Es más, el estudio de la serie de balances para el período 2001-2006 revela que el sistema presenta un desequilibrio actuarial estructural lo que provoca un aumento continuo del grado de insolvencia, pese a que el sistema ha obtenido un superávit de tesorería en el período objeto de estudio. La ausencia de balance actuarial, en este caso concreto, produce un "efecto espejismo" al ocultar la presencia de un déficit patrimonial, relativizar los déficits de caja futuros y sobre todo, diferir la toma de medidas efectivas para restaurar la solvencia del sistema y eliminar las "pérdidas" o incrementos en el déficit acumulado, que se están devengando por cada año que transcurre sin reforma. Las principales recomendaciones de política económica que se desprenden de este trabajo son dos: la necesidad de elaborar oficialmente el balance y el resultado actuarial anual con el fin de concienciar a la sociedad sobre la verdadera situación del sistema de pensiones, y la conveniencia de introducir un mecanismo de ajuste automático que, al menos predetermine la combinación de ajustes paramétricos graduales que empujen sostenidamente al sistema a la senda de la solvencia financiera en el largo plazo.España, Jubilación, Pensiones, Sistema de reparto, Solvencia, Suecia. Spain, Retirement, Pensions, Pay-as-you-go, Solvency, Sweden.

The US actuarial balance model for the pay-as-you-go system and its application to Spain

The aim of this paper is to formulate an approximation of the US actuarial balance model and apply it to the Spanish public retirement pension system under various scenarios in order to determine a consistent indicator of the system's financial state comparable to those used by the most advanced social security systems. This will enable us to answer the question as to whether there is any justification for reforming the pension system in Spain. This type of actuarial balance uses projections to show future challenges to the financial side of the pension system deriving basically from ageing, the projected increase in longevity and fluctuations in economic activity. If one is compiled periodically it can provide various indicators to help depoliticize the management of the pay-as-you-go system by bringing the planning horizons of politicians and the system itself closer together

Actuarial accounting for a notional defined contribution scheme combining retirement and longterm care benefits

This paper develops a social insurance accounting model for a notional defined contribution (NDC) scheme combining retirement and long-term care (LTC) contingencies. The procedure relies on standard double-entry bookkeeping and enables us to compile a “Swedish” type actuarial balance sheet (ABS) following a framework equivalent to an open group approach. This methodology is suitable for reporting the system’s solvency status and can show periodical changes in the system’s financial position by means of an income statement. The information underpinning the actuarial valuation is based on events and transactions that are verifiable at the valuation date, without considering expected future trends. The paper also contains an illustrative example to make it easier for policymakers to understand the main advantages and difficulties of our proposal. The policy conclusions stress the need to properly report social insurance benefits to enhance transparency and sustainability and to improve decision-making because it is in the public interest to do so

Social insurance accounting for a notional defined contribution scheme combining retirement and long-term care benefits

This paper develops a social insurance accounting model for a notional defined contribution (NDC) scheme combining retirement and long-term care (LTC) contingencies. The procedure relies on standard double-entry bookkeeping and enables us to compile a 'Swedish' type actuarial balance sheet (ABS) following a framework equivalent to an open group approach. This methodology is suitable for reporting the system's solvency status and can show periodical changes in the system's financial position by means of an income statement. The information underpinning the actuarial valuation is based on events and transactions that are verifiable at the valuation date, without considering expected future trends. The paper also contains an illustrative example to make it easier for policymakers to understand the main advantages and difficulties of our proposal. The policy conclusions stress the need to properly report social insurance benefits to enhance transparency and sustainability and to improve decision-making because it is in the public interest to do so

Does the pension system’s income statement really matter? A proposal for an NDC scheme with disability and minimum pension benefits

This paper develops a full accounting model for monitoring the solvency of a notional defined contribution (NDC) pension scheme with disability and minimum pension benefits. Using the annual report of the Swedish pension system as a benchmark (TSPS, 2018), we extend the “Swedish” actuarial balance developed by Pérez-Salamero et al. (2017) by adding an income statement which fully explains the reasons behind the changes in the system’s solvency by type of benefit. In line with the reference model, assets and liabilities are measured at present value at each reporting date, and changes in present value are reported in each period as income or expenses and are included on the income statement. Our proposed model is a step forward because it, also, incorporates the changes for disability pensions, the value of change in the discount rate and the explicit recognition of non-contributory rights (NCRs) into the Income statement. This accounting framework integrates both contributory and social aspects of public pensions and discloses the real cost of the disability contingency and the redistribution through minimum pensions. The paper contains a numerical example consisting of an income statement for a (fictional) already-functioning system to illustrate the main differences between the Swedish NDC scheme and our model. Mathematical details are presented in a comprehensive technical appendix.Instituto Complutense de Análisis EconómicoFac. de Ciencias Económicas y EmpresarialesTRUEMinisterio de Economía y Competitividad (MINECO)Gobierno VascoUniversidad de Alcalápu