The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest

Abstract

The article presents a method for calculating the cross-section internal rate of return on contributions to pension systems financed according to the pay-as-you-go principle. The method entails a procedure for valuing the contribution flow of pay-as-you-go financing, and identifies the complete set of factors that determine the cross-section internal rate of return. The procedure makes it possible to apply the algorithm of double-entry bookkeeping in analyzing and presenting the financial position and development of pay-as-you-go pension systems. JEL: classification: E62, E43, H55, J1, M41

Notional defined contribution pension schemes: why does only Sweden distribute the survivor dividend?

“…In this section, we extend the actuarial overlapping generations model developed by Boado-Penas and Vidal-Meliá (2014) based on those first put forward by Settergren and Mikula (2005), Boado-Penas, Valdés-Prieto, and Vidal-Meliá (2008) and Vidal-Meliá and Boado-Penas (2013). These papers were to some extent inspired by the accounting framework for organizing, summarizing and interpreting data on transfer systems and the life cycle developed in Lee (1994), Willis (1988) and Arthur and McNicoll (1978).…”

Social Insurance Accounting for a Notional Defined Contribution Scheme Combining Retirement and Long-Term Care Benefits

“…In line with the classic Swedish ABS [10], which basically aims to compute the value of the commitments to contributors and pensioners taken on by the system, rather than calculate how much the system would have to pay a third party if it was decided to contract out or transfer those commitments, the interest rate for discounting liabilities to pensioners is taken to be the growth rate of the covered wage bill (G). Several papers have used a discount rate tied to wage growth or overall economic growth [11,22,24,31,32,34,73].…”

“…Increased life expectancy not only adds to the pension liability; it also changes the pension liability's structure (the time profile of payments) in a way that does not need to be fully financed in a PAYG pension system [27]. The net effect of increases in life expectancy in an NDC scheme is an increased pension liability minus the increased value of the contribution flow that results from a higher turnover duration [13,22,31,77].…”

“…This paper builds on previous work carried out in the field of actuarial balances [11,[20][21][22][23][24][25][26][27][28][29][30][31][32][33]. All of these have dealt with the Swedish-type ABS, which has been compiled for various countries including Sweden [10,24,27,28], Spain [24,31], Japan [21], Canada [6,30], New Zealand [25], Germany [33] and Switzerland [11].…”

“…These concepts initially appear in connection with NDCs, the general outline of which can be found in Settergren [20], and in Settergren and Mikula [22]. They are both modeled in continuous time and thus provide theoretical support.…”