The Return on Social Security With Increasing Longevity

Knell, Markus

doi:10.1017/s1365100515000589

Cited by 4 publications

(6 citation statements)

References 29 publications

(41 reference statements)

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“…For the case with R c ( t ) = ψω c ( t ) there is the additional advantage that the continuous postponement of retirement enlarges the size of the PAYG system and thus produces ‘windfall gains’ that double the internal rate of return of all cohorts. This is analyzed and explained in more depth in Knell (2016).…”

Section: Increasing Longevitymentioning

confidence: 99%

“…For increasing longevity (γ > 0) the total benefits received by insured individuals outstrip the total contributions they have paid. This can be viewed as a special 'biological interest rate' as I have discussed in Knell (2016). One can also derive an approximation for the implied internal rate of return.…”

Section: Cohort Perspectivementioning

confidence: 99%

“…A second alternative specification is based on the cohort perspective. In particular, it can be shown (Knell, 2016) that increasing longevity gives rise to a positive internal rate of return. A NDC system that uses cohort life expectancy (CLE) as the annuity conversion factor can use this internal rate of return for indexation without violating the budget constraint.…”

Section: Introductionmentioning

confidence: 99%

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Increasing life expectancy and NDC pension systems

Knell

2016

Journal of Pension Economics and Finance

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In this paper, I study how pay-as-you-go pension systems of the notional defined contribution type can be designed such that they remain financially stable in the presence of increasing life expectancy. For this to happen three crucial parameters must be set in an appropriate way: the notional interest rate, the adjustment rate and the annuity conversion factor. I show that there exist two main approaches to implement a stable system. The first uses period-specific annuitization and indexation rates that correct for labor force increases, which are only due to rises in the retirement age which are necessary to ‘neutralize’ the increase in life expectancy. The second approach uses cohort-specific annuitization and indexation rates that are larger than in a stationary situation. This is due to the fact that a continuously increasing life expectancy leads to higher internal rates of return that can be passed on via the indexation.

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Section: Increasing Longevitymentioning

confidence: 99%

Section: Cohort Perspectivementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Increasing life expectancy and NDC pension systems

Knell

2016

Journal of Pension Economics and Finance

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“…Settergren and Mikula (2005) show that the internal rate of return for a pay-as-yougo pension entails not only the biological interest rate but also shifts in income and mortality patterns. Knell (2016) shows that a rise in life expectancy increases the internal rate of return for a pay-as-you-go pension scheme. However, these two papers do not fully take account of nonsteady-state population dynamics.…”

Section: Introductionmentioning

confidence: 99%

Long-Run Biological Interest Rate for Pay-As-You-Go Pensions in Advanced and Developing Countries

Nozaki

2017

IMF Working Papers

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How much of an internal rate of return would a sustainable pay-as-you-go pension system offer current and future generations equally? The answer is the sum of the Long-Run Biological Interest Rates (LBIR), the real-world equivalent of Samuelson's (1958) biological interest rate, and future productivity growth. Reflecting global population ageing, the median LBIR across 172 countries is as low as 1 percent per year. The LBIRs are particularly low in advanced countries, estimated to be negative in many of them, and require ample financial reserves today or future productivity growth to maintain participation in pension schemes. On the other hand, the LBIRs in less developed regions, such as in sub-Saharan Africa, are relatively high, indicating a potential to use a pay-as-you-go scheme to expand the coverage of public pensions. Raising the retirement age by five years brings up the LBIR by 40 basis points, significantly improving the long-run budget constraint of a pension scheme.

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“…Knell () analyses the impact of increasing longevity on the IRR from a life‐cycle perspective, considering two possible policy reactions to balance the pension scheme, either increasing the retirement age or cutting pension levels. His results suggest that with a simultaneously increasing retirement age, the positive effect of increased longevity on the IRR is nearly twice as large as if pension levels were cut.…”

mentioning

confidence: 99%

Accounting of the German Statutory Pension Scheme: Balance Sheet, Cross‐Sectional Internal Rate of Return and Implicit Tax Rate

Metzger

2019

Fiscal Studies

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We present a framework for accounting of the German statutory pension scheme and calculate a balance sheet for the period 2005–14. Estimating a funding ratio of about 90 per cent, we present some policy recommendations in order to restore balancing of assets and liabilities. Extending and applying the methodology proposed by Settergren and Mikula (2005), we additionally estimate the aggregate cross‐sectional internal rate of return of the German pension scheme over this period. We are able to show that these internal rates of return are mainly financed by increasing contributions and by increasing unfunded liabilities. Additionally, our analysis reveals that from an expenditure perspective, the major part of the internal rate of return results from changing longevity rather than other changes. We also estimate the implicit tax rates from a cross‐sectional perspective and find that they can mainly be interpreted as an ‘implicit wealth tax’ on pension wealth. Finally, we analyse the impact of demographic change on the balance sheet employing a population projection. While the pure demographic effect leads to a decreasing funding ratio during population ageing, the automatic balancing mechanisms of the German pension scheme lead to a significant overfunding in the long run from the accounting perspective adopted in the Swedish pension system.

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The Return on Social Security With Increasing Longevity

Cited by 4 publications

References 29 publications

Increasing life expectancy and NDC pension systems

Increasing life expectancy and NDC pension systems

Long-Run Biological Interest Rate for Pay-As-You-Go Pensions in Advanced and Developing Countries

Accounting of the German Statutory Pension Scheme: Balance Sheet, Cross‐Sectional Internal Rate of Return and Implicit Tax Rate

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