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On the financial sustainability of earnings-related pension schemes with ?pay-as-you-go? financing and the role of government-indexed bonds

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Author Info
ROBALINO, DAVID A.
BODOR, ANDR?S

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Abstract

In this paper we reconsider the idea of an earnings-related pension system with reserves invested in indexed government bonds as a mechanism to both ensure financial sustainability and improve security. The paper starts by reviewing the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. We show that current proxies for the sustainable rate, including the Swedish , are not stable and propose an alternative measure that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector macroeconomic model that embeds a notional account pension system we then show how GDP-indexed government bonds, if combined with the right measure for the sustainable rate of return on contributions, could be used to generate a sustainable and secure earnings-related pension system, without becoming a fiscal burden. The proposal is particularly attractive for countries considering reforms to earnings-related systems that have accumulated a large implicit pension debt. In this case, the government bonds allow the financing of this debt in a transparent way. The proposed mechanism can also facilitate the transition to a fully funded pension system when the government bonds are allowed to be traded.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 8 (2009)
Issue (Month): 02 (April)
Pages: 153-187
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Handle: RePEc:cup:jpenef:v:8:y:2009:i:02:p:153-187_00

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References listed on IDEAS
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  1. Robert Holzmann & Robert Palacios & Asta Zviniene, 2001. "On the Economics and Scope of Implicit Pension Debt: An International Perspective," Empirica, Springer, vol. 28(1), pages 97-129, March. [Downloadable!] (restricted)
  2. Robalino, David & Whitehouse, Edward & Mataoanu, Anca & Musalem, Alberto & Sherwood, Elisabeth & Sluchynsky, Oleksiy, 2005. "Pensions in the Middle East and North Africa: time for change," MPRA Paper 10448, University Library of Munich, Germany. [Downloadable!]
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This page was last updated on 2009-11-26.

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