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

Author

Listed:
  • Frédéric Gannon

    (CERENE - Centre d'Etude et de Recherche en économiE et gestioN LogistiquE - ULH - Université Le Havre Normandie - NU - Normandie Université, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Florence Legros

    (SDF - Laboratoire Structure et Dynamiques Financières - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres)

  • Vincent Touzé

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

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 pensions schemes : building a smooth automatic balance mechanism with an application to the US social security," SciencePo Working papers Main hal-03469952, HAL.
    • Handle: RePEc:hal:spmain:hal-03469952
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03469952
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    References listed on IDEAS

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    1. Graciela Chichilnisky, 1997. "What Is Sustainable Development?," Land Economics, University of Wisconsin Press, vol. 73(4), pages 467-491.
    2. Frédéric Gannon & Stéphane Hamayon & Florence Legros & Vincent Touzé, 2014. "Sustainability of the French first pillar pension scheme (CNAV): assessing automatic balance," SciencePo Working papers Main hal-03460192, HAL.
    3. Carlos Vidal-Meliá & María del Carmen Boado-Penas & Ole Settergren, 2009. "Automatic Balance Mechanisms in Pay-As-You-Go Pension Systems," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(2), pages 287-317, April.
    4. Florence Legros & Frédéric Gannon & Stéphane Hamayon & Vincent Touzé, 2014. "Sustainability of the French first pillar pension scheme (CNAV)," Post-Print hal-01513971, HAL.
    5. 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(3), pages 233-250, November.
    6. Frédéric Gannon & Stéphane Hamayon & Florence Legros & Vincent Touzé, 2014. "Sustainability of the French first pillar pension scheme (CNAV): assessing automatic balance mechanisms," Post-Print hal-02093458, HAL.
    7. Humberto Godínez‐Olivares & María del Carmen Boado‐Penas & Athanasios A. Pantelous, 2016. "How to Finance Pensions: Optimal Strategies for Pay‐as‐You‐Go Pension Systems," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 35(1), pages 13-33, January.
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    9. 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(2), pages 115-138, July.
    10. 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.
    11. 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.
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    13. 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.
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    More about this item

    Keywords

    Pension Scheme sustainablity; Automatic balance mechanisms; Dynamic programming;
    All these keywords.

    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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