Measures of implicit liabilities for pension systems: quantification, analytical properties and reactions to typical demographic shocks
The notion of implicit liabilities for pension systems can be interpreted in several ways. Two approaches are centered on benefits due to current pensioners or to be paid to current contributors: these two approaches are the method of accrued-to-date liabilities and the closed-group method. A third approach also includes prospective benefits and contributions for future cohorts of contributors: this approach is generally referred to as the method of open-system liabilities. This paper presents some indicative quantifications of these three approaches for French pensions. It also gives some analytical results concerning the steady state level of liabilities computed according to the first two approaches. We finally compare the behaviour of these three approaches under situations of stylized demographic change, i.e. a baby-boom and/or a continuous increase in life expectancy. These simulations confirm that the open system approach is more informative and more convenient when the question we are interested in is the question of long run sustainability, and not the question of prefunding of current entitlements.
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