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Sustainability of pension schemes : building a smooth automatic balance mechanism with an application to tu US social security


  • Frédéric Gannon

    (University of Le Havre-EDEHN)

  • Florence Legros

    (ICN Business School & University Paris-Dauphine)

  • Vincent Touzé

    (OFCE, Sciences Po)


We build a "smooth" automatic balance mechanism (S–ABM) which would result from an optimal tradeoff between increasing the receipts and reducing the pension expenditures. The S- ABM obtains from minimizing an intertemporal discounted quadratic loss function under an intertemporal budget balance constraint. The main advantage of our model of "optimal" adjustment is its ability to analyse various configurations in terms of automatic balance mechanisms (ABM) by controlling the adjustment pace. This S-ABM permits to identify two limit cases: the “flat Swedish-type ABM” and the “fiscal-cliff US- type ABM”. These cases are obtained by assuming very high adjustment costs on revenue (implying only pension benefit adjustment) and by choosing particular sequences of publicdiscount rates. We then apply this ABM to the case of the United States Social Security to evaluate the adjustments necessary to ensure financial solvency. These assessments are made under various assumptions about forecast time horizon, public discount factorand weighting of social costs associated with increased receipts or lower expenditures

Suggested Citation

  • Frédéric Gannon & Florence Legros & Vincent Touzé, 2016. "Sustainability of pension schemes : building a smooth automatic balance mechanism with an application to tu US social security," Documents de Travail de l'OFCE 2016-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  • Handle: RePEc:fce:doctra:1616

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    References listed on IDEAS

    1. Settergren, Ole & Mikula, Boguslaw D., 2005. "The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 115-138, July.
    2. Settergren, Ole & Mikula, Boguslaw D., 2005. "The Rate of Return of Pay-As-You-Go Pension Systems: A More Exact Consumption-Loan Model of Interest," Discussion Paper 249, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    3. Graciela Chichilnisky, 1997. "What Is Sustainable Development?," Land Economics, University of Wisconsin Press, vol. 73(4), pages 467-491.
    4. Berger, Charlie & Lavigne, Anne, 2007. "A model of the French pension reserve fund: what could be the optimal contribution path rate?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(03), pages 233-250, November.
    5. Graciela Chichilnisky, 1996. "An axiomatic approach to sustainable development," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 13(2), pages 231-257, April.
    6. Frédéric Gannon & Stéphane Hamayon & Florence Legros & Vincent Touze, 2014. "Sustainability of the French first pillar pension scheme (CNAV): assessing automatic balance," Sciences Po publications info:hdl:2441/5boabpc9ms8, Sciences Po.
    7. Didier Blanchet & Florence Legros, 2002. "France: The Difficult Path to Consensual Reforms," NBER Chapters,in: Social Security Pension Reform in Europe, pages 109-136 National Bureau of Economic Research, Inc.
    8. Kotlikoff, Laurence J., 2011. "Fixing Social Security — What Would Bismarck Do?," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 415-428, June.
    9. Aaron, Henry J., 2011. "Social Security Reconsidered," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 385-414, June.
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    More about this item


    Pensions scheme sustainability; automatic balance mechanisms; dynamic programming;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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