On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds

In this paper we reconsider the idea of an earnings-related pension system with reserves invested in indexed government bonds as a mechanism to both ensure financial sustainability and improve security. The paper starts by reviewing the characterization of the sustainable rate of return of an earnin...

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Main Authors:	Robalino, David A., Bodor, Andras
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Personal Finance D140 Social Security and Public Pensions H550 Retirement Retirement Policies J260 Nonwage Labor Costs and Benefits Private Pensions J320
Online Access:	http://hdl.handle.net/10986/4890

id	okr-10986-4890
recordtype	oai_dc
spelling	okr-10986-48902021-04-23T14:02:20Z On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds Robalino, David A. Bodor, Andras Personal Finance D140 Social Security and Public Pensions H550 Retirement Retirement Policies J260 Nonwage Labor Costs and Benefits Private Pensions J320 In this paper we reconsider the idea of an earnings-related pension system with reserves invested in indexed government bonds as a mechanism to both ensure financial sustainability and improve security. The paper starts by reviewing the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. We show that current proxies for the sustainable rate, including the Swedish 'gyroscope', are not stable and propose an alternative measure that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector macroeconomic model that embeds a notional account pension system we then show how GDP-indexed government bonds, if combined with the right measure for the sustainable rate of return on contributions, could be used to generate a sustainable and secure earnings-related pension system, without becoming a fiscal burden. The proposal is particularly attractive for countries considering reforms to earnings-related systems that have accumulated a large implicit pension debt. In this case, the government bonds allow the financing of this debt in a transparent way. The proposed mechanism can also facilitate the transition to a fully funded pension system when the government bonds are allowed to be traded. 2012-03-30T07:30:14Z 2012-03-30T07:30:14Z 2009 Journal Article Journal of Pension Economics and Finance 14747472 http://hdl.handle.net/10986/4890 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Personal Finance D140 Social Security and Public Pensions H550 Retirement Retirement Policies J260 Nonwage Labor Costs and Benefits Private Pensions J320
spellingShingle	Personal Finance D140 Social Security and Public Pensions H550 Retirement Retirement Policies J260 Nonwage Labor Costs and Benefits Private Pensions J320 Robalino, David A. Bodor, Andras On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	In this paper we reconsider the idea of an earnings-related pension system with reserves invested in indexed government bonds as a mechanism to both ensure financial sustainability and improve security. The paper starts by reviewing the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. We show that current proxies for the sustainable rate, including the Swedish 'gyroscope', are not stable and propose an alternative measure that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector macroeconomic model that embeds a notional account pension system we then show how GDP-indexed government bonds, if combined with the right measure for the sustainable rate of return on contributions, could be used to generate a sustainable and secure earnings-related pension system, without becoming a fiscal burden. The proposal is particularly attractive for countries considering reforms to earnings-related systems that have accumulated a large implicit pension debt. In this case, the government bonds allow the financing of this debt in a transparent way. The proposed mechanism can also facilitate the transition to a fully funded pension system when the government bonds are allowed to be traded.
format	Journal Article
author	Robalino, David A. Bodor, Andras
author_facet	Robalino, David A. Bodor, Andras
author_sort	Robalino, David A.
title	On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds
title_short	On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds
title_full	On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds
title_fullStr	On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds
title_full_unstemmed	On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds
title_sort	on the financial sustainability of earnings-related pension schemes with 'pay-as-you-go' financing and the role of government-indexed bonds
publishDate	2012
url	http://hdl.handle.net/10986/4890
_version_	1764393125493604352

On the Financial Sustainability of Earnings-Related Pension Schemes with 'Pay-as-You-Go' Financing and the Role of Government-Indexed Bonds

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