A number of European countries are reforming their pension bene®t formulas by adopting`n otional'' accounts. These accounts are used to determine individual bene®ts, but pay-asyou-go ®nancing is retained. This paper addresses the belief that by choosing adjustment rules cleverly, notional accounts can provide automatic ®nancial equilibrium in the short run. If this were true, it would be a valuable advantage in terms of insulating the government budget from demographic pressures, while insulating the pension budget from ®scal pressures. It is shown that notional account bene®t formulas cannot provide automatic ®nancial equilibrium in the short run. The paper also suggests that if indexing rules are chosen in a particular way, and shocks revert rapidly to a mean, the pension institution may achieve ®nancial stability in the long run. However, long-run stability is unlikely to be valuable because political interference occurs in the short run.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper provides the first estimate of the actuarial balance of the Spanish contributory pension system for the old age contingency, based on official data. The novel entry in the balance sheet, named "Contribution Asset" or "Hidden Asset", is at the centre of the theoretical discussion. A comparison between the official balance sheet for the Swedish national account system and our balance sheet for the Spanish system is also provided. The main finding is that the Spanish pension system has an insolvency rate of 31.4 %. The policy implication is that unless current legislation is reformed, Spanish taxpayers (the plan sponsor) should count on making transfers to the pension system with a present discounted value of 31.4 % of current liabilities. Moreover, a comparison of the consecutive balance sheets for 2001-06 shows that the degree of insolvency is growing over time, even though the cash-flow outcome has improved over the same period. Taking steps to reverse this trend and restore solvency is in the Spanish taxpayers' interest, and possibly also in the interest of those in the European Union who recognise that there is a chance that they may have to support the Spanish budget in the future. Terms of use: Documents inJEL Code: H55, J26, M49.Keywords: retirement, pay-as-you-go system, accountancy, solvency, pensions, Spain. María del Carmen Boado-Penas Department of Financial Economics and

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"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." Copyright � CEPR, CES, MSH, 2005.

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