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Securitization of taxes implicit in PAYG pensions


  • Salvador Valdés-Prieto


type="main" xml:lang="en"> To preserve solvency, a pay-as-you-go (PAYG) pension system needs to adjust contribution rates and pension promises over time. Currently, it is not possible to hedge in the financial market against politically determined uncertainty as regards these parameters. I consider a policy reform whereby property rights are established on the implicit lifetime tax levied by PAYG finance, and are assigned to the pension institution. These property rights are well defined if the reform also features rule-based allocation of aggregate risk, in the form of defined-contribution or defined-benefit schemes. I show that a PAYG pension system may indeed be instantly restructured so as to minimize political risk and allow financial-market diversification of risk. A side benefit is securitization of human-capital flows, which are not traded in existing financial markets. The new securities, if traded in appropriately competitive financial markets, are complementary to the Notional Account reforms of the 1990s. However, fiscal instability can increase if securitization is implemented in the absence of initial solvency and credible adoption of rule-based methods to allocate aggregate risk. — Salvador Valdés-Prieto

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  • Salvador Valdés-Prieto, 2005. "Securitization of taxes implicit in PAYG pensions," Economic Policy, CEPR;CES;MSH, vol. 20(42), pages 215-265, April.
  • Handle: RePEc:bla:ecpoli:v:20:y:2005:i:42:p:215-265

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    Cited by:

    1. Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
    2. Olivia S Mitchell & John Piggott & Michael Sherris & Shaun Yow, 2006. "Financial Innovation for an Ageing World," RBA Annual Conference Volume,in: Christopher Kent & Anna Park & Daniel Rees (ed.), Demography and Financial Markets Reserve Bank of Australia.
    3. Carlos Vidal-Meli· & Inmaculada DomÌnguez-Fabi·n & MarÌa del Carmen Boado-Penas, "undated". "Notional Defined Contribution Accounts (NDCs): Solvency and Risk; Application to the Case of Spain," Studies on the Spanish Economy 226, FEDEA.
    4. Oksanen, Heikki, 2006. "Actuarial Neutrality across Generations Applied to Public Pensions under Population Ageing: Effects on Government Finances and National Saving," Discussion Paper 284, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    5. Carlos Vidal-Meliá & María del Carmen Boado-Penas, 2013. "Compiling the actuarial balance for pay-as-you-go pension systems. Is it better to use the hidden asset or the contribution asset?," Applied Economics, Taylor & Francis Journals, vol. 45(10), pages 1303-1320, April.
    6. Holzmann, Robert & Koettl, Johannes, 2011. "Portability of pension, health, and other social benefits : facts, concepts, issues," Social Protection and Labor Policy and Technical Notes 62725, The World Bank.
    7. Heikki Oksanen, 2010. "The Chinese pension system - First results on assessing the reform options," European Economy - Economic Papers 2008 - 2015 412, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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