Does the Pension System’s Income Statement Really Matter? A Proposal for An NDC Scheme with Disability and Minimum Pension Benefits

ICAE - Instituto Complutense de Analisis Economico, Working Paper No. 1922, July 2019 updated version (October 17, 2019)

57 Pages Posted: 17 Jul 2019 Last revised: 24 Nov 2019

See all articles by Anne M. Garvey

Anne M. Garvey

Universidad de Alcala de Henares

Manuel Ventura-Marco

University of Valencia - Faculty of Economics

Carlos Vidal-Meliá

University of Valencia - Department of Financial Economics

Date Written: October 17, 2019

Abstract

This paper develops a full accounting model for monitoring the solvency of a notional defined contribution (NDC) pension scheme with disability and minimum pension benefits. Using the annual report of the Swedish pension system as a benchmark (TSPS, 2019), we extend the “Swedish” actuarial balance developed by Pérez-Salamero et al. (2017) by adding an income statement which fully explains the reasons behind the changes in the system’s solvency by type of benefit. In line with the reference model, assets and liabilities are measured at present value at each reporting date, and changes in present value are reported in each period as income or expenses and are included on the income statement. Our proposed model is a step forward because it, also, incorporates the changes for disability pensions, the value of change in the discount rate and the explicit recognition of non-contributory rights (NCRs) into the Income statement. This accounting framework integrates both contributory and social aspects of public pensions and discloses the real cost of the disability contingency and the redistribution through minimum pensions. The paper contains a numerical example consisting of an income statement for a (fictional) already-functioning system to illustrate the main differences between the Swedish NDC scheme and our model. Mathematical details are presented in a comprehensive technical appendix.

Keywords: Disability Insurance, Minimum Pensions, Notional Defined Contribution, Pension Accounting, Sweden, True and Fair View

JEL Classification: G22, H55, H83, J26, M48

Suggested Citation

Garvey, Anne M. and Ventura-Marco, Manuel and Vidal-Meliá, Carlos, Does the Pension System’s Income Statement Really Matter? A Proposal for An NDC Scheme with Disability and Minimum Pension Benefits (October 17, 2019). ICAE - Instituto Complutense de Analisis Economico, Working Paper No. 1922, July 2019 updated version (October 17, 2019). Available at SSRN: https://ssrn.com/abstract=3421337 or http://dx.doi.org/10.2139/ssrn.3421337

Anne M. Garvey

Universidad de Alcala de Henares ( email )

Plaza de San Diego s/n
E-28801 Madrid
Spain

Manuel Ventura-Marco

University of Valencia - Faculty of Economics ( email )

Valencia, E-46022
Spain

Carlos Vidal-Meliá (Contact Author)

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

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