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

Abstract

This paper shows the usefulness of the automatic balance mechanisms (ABMs) and explores the issue of introducing an ABM into the Spanish public contributory retirement pension system. We define the concept of the automatic balance mechanism and carry out an analysis of those 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 simulate 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. The main conclusion reached is that, given the system's situation of (in)solvency, the introduction of an automatic mechanism is highly recommended in order to set the system on the road to long-term financial solvency, neutralise the effects of ageing, changes in socio-economic conditions and the continuing increase in longevity, and to reduce populism in pension policy.

Keywords: Actuarial Analysis, Actuarial Balance, Spain, Political risk, Solvency

JEL Classification: H55, J26, M49