Compiling the Actuarial Balance for Pay-As-You-Go Pension Systems. Is It Better to Use the Hidden Asset or the Contribution Asset?

Abstract

The aim of this paper is twofold: to determine the connection between the “contribution asset” and the “hidden asset” and to discover whether using either of them to compile the actuarial balance in Swedish-type pay-as-you-go pension systems will provide a reliable solvency indicator. We develop an overlapping generations model and apply it to the defined benefit pay-as-you-go system, although it would be just as valid for NDC systems. On the theoretical side the main conclusion is that, despite their very different natures, in a simplified scenario the contribution asset and the hidden asset could coincide if r - the real rate of interest - is equal to the growth in the wage bill. On the applied side there are three main reasons why it would be better to use the contribution asset to calculate the Swedish-type actuarial balance as a solvency indicator: it has a financial-actuarial basics in the pay-as-you-go pension system as there is no need to use the real rate of interest; it is simple to calculate as there is no need for projections to be made; and it is clear in diagnosing solvency, whereas the hidden asset supplies a solvency indicator which is not always consistent with the system's financial health.

Keywords: Defined Benefits, Sweden, USA, Transparency

JEL Classification: H55, H83, J26, M49