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Neutral or Fair?: Actuarial Concepts and Pension-System Design

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  • Monika Queisser
  • Edward R. Whitehouse

Abstract

1. Economists and policymakers increasingly use the word “actuarial” in the analysis of pension systems and retirement incentives. But the debate is often confused. “Actuarial fairness” and “actuarial neutrality” are promoted loosely as desirable goals of pension reform. This paper distinguishes two actuarial concepts and discusses their importance for defined-benefit, defined-contribution and notional accounts pension plans. • Actuarial fairness, which requires that the present value of lifetime contributions equals the present value of lifetime benefits. Actuarial fairness relates to the entire lifetime of contributions and benefits • Actuarial neutrality, which requires that the present value of accrued pension benefits for working an additional year is the same as in the year before (meaning that benefits increase only by the additional entitlement earned in that year). Conversely, retiring a year earlier should reduce the pension benefit both by the entitlement that would have been earned during the year and by an amount to reflect the longer duration for which the pension must be paid. Actuarial neutrality is a marginal concept, relating to the effect of working an additional year. 2. The discussion shows that it is very difficult to design pension systems around these actuarial concepts alone. Most retirement income systems have several components; some of these may be actuarially fair or actuarially neutral but others, notably safety-nets to protect retirees from poverty, will by definition not fulfil the conditions of actuarial fairness or neutrality. Finally, both concepts are defined across the population, regardless of the systematic differences in life-expectancy between women and men or between low-income groups and richer workers. People who expect to live longer will get a better deal out of the pension system than those who are expected to die earlier. 3. Les économistes et les décideurs utilisent de plus en plus le terme “actuariel” dans le cadre de l’analyse des systèmes de pension et des incitations à la retraite. Pour autant, le débat manque souvent de clarté. « L’équité actuarielle » et « la neutralité actuarielle » sont deux concepts vaguement encouragés comme étant des objectifs souhaitables pour les réformes de pension. Ce document fait la distinction entre ces deux concepts actuariels et montre leur importance pour les plans de retraite à prestations définies, à cotisations définies et pour le modèle des comptes notionnels. • L’équité actuarielle préconise que la valeur actuelle des cotisations sur l’ensemble de la carrière professionnelle soit égale à la valeur actuelle des prestations perçues pendant la retraite. • La neutralité actuarielle préconise que la valeur actuelle des prestations de pensions constituées pour une année supplémentaire de travail soit la même que pour l’année précédente (signifiant que les prestations augmentent seulement conformément aux droits supplémentaires gagnés cette année-là). A l’inverse, partir à la retraite un an plus tôt devrait réduire les prestations de pensions par les droits qui auraient dû être acquis cette année et par un montant reflétant l’allongement de la durée pendant laquelle la retraite doit être payée. Neutralité actuarielle est un concept marginal, en rapport avec l’incidence de travailler un an de plus. 4. Le débat montre qu’il est très difficile d’élaborer des systèmes de pension autour de ces concepts actuariels seuls. La plupart des systèmes de retraite ont plusieurs éléments; certains peuvent être actuariellement justes ou actuariellement neutres mais les autres comme notamment les filets de sécurité devant protéger les retraités de la pauvreté, ne pourront par définition remplir les conditions d’équité ou de neutralité actuarielle. Finalement, les deux concepts sont définis parmi la population, sans se soucier des différences systématiques dans la longévité entre femmes et hommes ou entre les groupes de bas revenus et les travailleurs plus aisés. Les personnes qui vivront plus longtemps obtiendront de meilleurs résultats de leur système de pension que ceux qui mourront plus tôt.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Social, Employment and Migration Working Papers with number 40.

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Date of creation: 04 Dec 2006
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Handle: RePEc:oec:elsaab:40-en

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