Automatic Balance Mechanisms in Pay-As-You-Go Pension Systems

Abstract

The aim of this paper is twofold: to show the usefulness of automatic balance mechanisms (ABMs) and to explore the issue of introducing an ABM into the Spanish state contributory retirement pension system. With this in mind, we define the concept of the ABM and carry out an analysis of that existing in Sweden, Canada, Germany, Japan and Finland. We also present an indicator of the Spanish system's solvency which emerges from the actuarial balance sheet, and simulates the effect that certain changes in the parameters of the present system would have on solvency, showing the direction that could be taken if the mechanism were to be introduced in Spain. A comparison between the official balance sheet for the Swedish notional account system and our balance sheet for the Spanish contributory pension system is also provided.

The continuous sample of working lives: improving its representativeness

“…The CSWL is a dataset that has been used in a considerable number of studies, especially on labour economics (Treviño et al 2008;Benavides et al 2010;Vall Castello 2012;Hospido 2013, 2016;Solé et al 2013;Agliari et al 2014;Arranz and García-Serrano 2014;Barra et al 2014 and Nagore García and van Soest 2016) and the Spanish public pension system (Antón Pérez et al 2007;Argimón et al 2007;Boado-Penas et al 2008;Moral Arce et al 2008;Vidal Meliá et al 2009;Cairó Blanco 2010;Peinado Martínez 2011;Devesa et al 2012;Domínguez Fabián et al 2012;Meneu Gaya and Encinas Goenechea 2012;Vicente Merino et al 2012;Conde Ruiz andVegas Sánchez et al 2013). Other studies give detailed descriptions of its characteristics, advantages and limitations.…”

How to Finance Pensions: Optimal Strategies for Pay‐as‐You‐Go Pension Systems

“…Following this process of reforms, Vidal-Meliá et al (2009 propose an automatic balance mechanism 3 (ABM), defined as a set of predetermined measures established by law to be applied immediately as required according to an indicator that reflects the financial health of the system. Its purpose, through successive application, is to re-establish the financial equilibrium of PAYGO pension systems with the aim of making those systems viable without the repeated intervention of the legislators.…”

“… For more information on ABMs see, for instance, Turner (), Vidal‐Meliá et al (), OECD () and Appendix A.…”

Individual information for pension contributors: Recommendations for Spain based on international experience

“…This type of system bears a high level of implicit uncertainty as a result of the possibility that the authority managing the system may decide, for any number of reasons, to implement reform to reduce the rights credited to contributors and/or the amount of pensions currently being paid. Explicit uncertainty is also increasing in countries with DB systems, as suggested by Vidal‐Meliá, Boado‐Penas and Settergren (2009, 2010), where there is a tendency to link benefits to the evolution of demographic parameters by means of an automatic adjustment mechanism. This occurs, for example, in Portugal, Finland, Germany and, from 2032 onwards, in Spain, although the latter should not be described as automatic since it incorporates a high level of discretionary choice.…”