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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, ANDRÁS

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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  • Robalino, David A. & Bodor, András, 2009. "On the financial sustainability of earnings-related pension schemes with ‘pay-as-you-go’ financing and the role of government-indexed bonds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(02), pages 153-187, April.
  • 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. 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.
    3. Robert Holzmann & Robert Palacios & Asta Zviniene, 2001. "On the Economics and Scope of Implicit Pension Debt: An International Perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, 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. Robalino, David & Vodopivec, Milan & Bodor, Andras, 2009. "Savings for unemployment in good or bad times : options for developing countries," Social Protection and Labor Policy and Technical Notes 50320, The World Bank.
    3. 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.
    4. Robert Holzmann & Johannes Koettl, 2015. "Portability of Pension, Health, and Other Social Benefits: Facts, Concepts, and Issues," CESifo Economic Studies, CESifo, vol. 61(2), pages 377-415.
    5. Simonovits, András & Gál, Róbert Iván, 2012. "A magyar nyugdíjrendszer éves hozamrátái
      [Annual rates of return in the Hungarian pension system]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 963-987.
    6. Alfonso R. Sánchez, 2014. "The automatic adjustment of pension expenditures in Spain:an evaluation of the 2013 pension reform," Working Papers 1420, Banco de España;Working Papers Homepage.
    7. Ronald Lee & Andrew Mason (ed.), 2011. "Population Aging and the Generational Economy," Books, Edward Elgar Publishing, number 13816, April.
    8. 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.
    9. Wang, Lijian & Béland, Daniel & Zhang, Sifeng, 2014. "Pension financing in China: Is there a looming crisis?," China Economic Review, Elsevier, vol. 30(C), pages 143-154.
    10. 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).
    11. Róbert I Gál & Vera Gergely & Márton Medgyesi, 2011. "National Transfer Accounts in Hungary: contribution asset and returns in a pay-as-you-go pension," Chapters,in: Population Aging and the Generational Economy, chapter 32 Edward Elgar Publishing.

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