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Sustainability of pension schemes : building a smooth automatic balance mechanism with an application to tu US social security

Author

Listed:
  • Frédéric Gannon

    (University of Le Havre-EDEHN)

  • Florence Legros

    (ICN Business School & University Paris-Dauphine)

  • Vincent Touzé

    (OFCE, Sciences Po)

Abstract

We build a "smooth" automatic balance mechanism (S–ABM) which would result from an optimal tradeoff between increasing the receipts and reducing the pension expenditures. The S- ABM obtains from minimizing an intertemporal discounted quadratic loss function under an intertemporal budget balance constraint. The main advantage of our model of "optimal" adjustment is its ability to analyse various configurations in terms of automatic balance mechanisms (ABM) by controlling the adjustment pace. This S-ABM permits to identify two limit cases: the “flat Swedish-type ABM” and the “fiscal-cliff US- type ABM”. These cases are obtained by assuming very high adjustment costs on revenue (implying only pension benefit adjustment) and by choosing particular sequences of publicdiscount rates. We then apply this ABM to the case of the United States Social Security to evaluate the adjustments necessary to ensure financial solvency. These assessments are made under various assumptions about forecast time horizon, public discount factorand weighting of social costs associated with increased receipts or lower expenditures

Suggested Citation

  • Frédéric Gannon & Florence Legros & Vincent Touzé, 2016. "Sustainability of pension schemes : building a smooth automatic balance mechanism with an application to tu US social security," Documents de Travail de l'OFCE 2016-16, Observatoire Francais des Conjonctures Economiques (OFCE).
    • Handle: RePEc:fce:doctra:1616
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    1. repec:hal:spmain:info:hdl:2441/5boabpc9ms84bro8m866dns6kj is not listed on IDEAS
    2. Settergren, Ole & Mikula, Boguslaw D., 2005. "The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(2), pages 115-138, July.
    3. Settergren, Ole & Mikula, Boguslaw D., 2005. "The Rate of Return of Pay-As-You-Go Pension Systems: A More Exact Consumption-Loan Model of Interest," Discussion Paper 249, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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    5. Frédéric Gannon & Stéphane Hamayon & Florence Legros & Vincent Touzé, 2014. "Sustainability of the French first pillar pension scheme (CNAV): assessing automatic balance mechanisms," SciencePo Working papers Main hal-02093458, HAL.
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    7. Carlos Vidal-Meliá & María del Carmen Boado-Penas & Ole Settergren, 2009. "Automatic Balance Mechanisms in Pay-As-You-Go Pension Systems," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(2), pages 287-317, April.
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    Cited by:

    1. Emilio Gómez-Déniz & Jorge V. Pérez-Rodríguez & Simón Sosvilla-Rivero, 2022. "Analyzing How the Social Security Reserve Fund in Spain Affects the Sustainability of the Pension System," Risks, MDPI, vol. 10(6), pages 1-17, June.

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    More about this item

    Keywords

    Pensions scheme sustainability; automatic balance mechanisms; dynamic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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