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Compiling the actuarial balance for pay-as-you-go pension systems. Is it better to use the hidden asset or the contribution asset?

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  • Carlos Vidal-Meli�
  • María del Carmen Boado-Penas
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    Abstract

    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 system's financial health.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 45 (2013)
    Issue (Month): 10 (April)
    Pages: 1303-1320

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    Handle: RePEc:taf:applec:45:y:2013:i:10:p:1303-1320

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    References

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    1. Dirk Krueger & Felix Kubler, 2003. "Pareto Improving Social Security Reform when Financial Markets are Incomplete?," NBER Working Papers 9410, National Bureau of Economic Research, Inc.
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    3. AfDB AfDB, . "AfDB Group Annual Report 2009 (Arabic)," Annual Report, African Development Bank, number 68 edited by Koua Louis Kouakou, 7.
    4. Settergren, Ole & Mikula, Boguslaw D., 2005. "The Rate of Return of Pay-As-You-Go Pension Systems: A More Exact Consumption-Loan Model of Interest," Discussion Paper 249, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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