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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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  • Robalino, David A.
  • Bodor, Andras

Abstract

In this paper the authors 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. They start by reviewing the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. The authors show that current proxies for the sustainable rate, including the Swedish"gyroscope,"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 they 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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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3966.

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Date of creation: 01 Jul 2006
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Handle: RePEc:wbk:wbrwps:3966

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Keywords: Economic Theory&Research; Technology Industry; Pensions&Retirement Systems; Economic Growth; Population Policies;

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  1. Robalino, David & Tatyana, Bogomolova, 2006. "lmplicit Pension Debt in the Middle-East and North Africa Magnitude and Fiscal lmplications," MPRA Paper 12019, University Library of Munich, Germany.
  2. David Robalino, 2005. "Pensions in the Middle East and North Africa: Time for Change," World Bank Publications, The World Bank, number 7427, October.
  3. 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.
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Cited by:
  1. Eduardo Fajnzylber & David Robalino, 2010. "Assessing Fiscal Costs and the Distribution of Pensions in Transitions to FDC and NDC Systems: A Retrospective Analysis for Chile," Working Papers wp_005, Adolfo Ibáñez University, School of Government.
  2. Palmer, Edward, 2011. "Generic NDC - Equilibrium, Valuation and Risk Sharing with and without NDC Bonds," Working Paper Series 2011:3, Uppsala University, Department of Economics.
  3. Robert Holzmann & Johannes Koettl, 2012. "Portability of Pension, Health, and other Social Benefits: Facts, Concepts, and Issues," CESifo Working Paper Series 4002, CESifo Group Munich.
  4. Robalino, David & Vodopivec, Milan & Bodor, Andras, 2009. "Savings for unemployment in good or bad times : options for developing countries," Social Protection Discussion Papers 50320, The World Bank.
  5. Holzmann, Robert & Jousten, Alain, 2010. "Addressing the Legacy Costs in an NDC Reform: Conceptualization, Measurement, Financing," IZA Discussion Papers 5296, Institute for the Study of Labor (IZA).
  6. Holzmann, Robert & Koettl, Johannes, 2011. "Portability of Pension, Health, and Other Social Benefits: Facts, Concepts, Issues," IZA Discussion Papers 5715, Institute for the Study of Labor (IZA).

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