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

The Geneva Papers on Risk and Insurance: Issues and Practice 34 (2) 287-317

35 Pages Posted: 13 May 2008 Last revised: 4 Sep 2015

See all articles by Carlos Vidal-Meliá

Carlos Vidal-Meliá

University of Valencia - Department of Financial Economics

María el Carmen Boado-Penas

University of Liverpool

Ole Settergren

Independent

Date Written: February 13, 2009

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

Suggested Citation

Vidal-Meliá, Carlos and Boado-Penas, María del Carmen and Settergren, Ole, Automatic Balance Mechanisms in Pay-as-You-Go Pension Systems (February 13, 2009). The Geneva Papers on Risk and Insurance: Issues and Practice 34 (2) 287-317, Available at SSRN: https://ssrn.com/abstract=1132686 or http://dx.doi.org/10.2139/ssrn.1132686

Carlos Vidal-Meliá (Contact Author)

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

María del Carmen Boado-Penas

University of Liverpool ( email )

Liverpool
United Kingdom

Ole Settergren

Independent ( email )

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