The Balance Sheet of the Swedish National Pension System

Transcription

1 The Balance Sheet of the Swedish National Pension System

2 Swedish pension reform - a long process 1991 Commission set up 1992 Draft of a new pension plan 1994 parliament adopts principles of the new pension plan 1998 parliament adopts the main legislation of the new pension plan 2001 legislation on the automatic balance mechanism adopted first payments according to new system But transition to new system is relatively quick!

3 Four basic design options Tie between contribution and accrued pension credit 100 % Payasyougo Defined Contribution I III Defined Benefit II Funded IV 100 % insured Theoretical or formal risk distribution 100 % insurer (= taxpayers) 0 % 0 % 100% Degree of funding

4 Swedish Reform Strategy Contribution Contribution % % Contribution 2.5 % Defined Contribution Defined Benefit D S G Inkomstpension NDC I Old pension scheme III Premiepension Funded II IV 100 % insured legislated Theoretical or formal risk distribution 100 % insurer (= taxpayers) D = Disability pension S = Survivors pension G= Guarantee pension PAYGO Funded

5 Each crown paid during life result in the same amount of pension credit SEK Pensionable income of insured 16 % Pay-as-you-go Funded 2,5 % Age of Ageinsured

6 0 Development of notional account The amount on the notional account, SEK Survivors bonus Interest with change in average income Administration Net indexation Convertion to an annuity Life expectancy (65 =18,5) Interest rate 1,6% Annuity divisor Credited 15,7 contributions = Pension Age -

7 Pension as an annuity Real value of pension Imputed interest 0.0 % growth 1.6 %..interest 1.6 % growth 2.0 %..interest 1.6 % growth 1.6 %..interest 1.6 % growth 1.0 % Age of pensioner 85

8 Traditional social security indicators of financial balance (single entry) versus The double entry bookkeeping indicators of financial balance developed for the Swedish NDC scheme

9 Traditional social security indicators of financial balance (single entry) Examples from the Swedish NDC system:

10 Simulations of net contribution in percent of total contributions 90 s Born in the 1940 s 60 s Without balance mechanism

11 Simulations of fund ratio, Market value of buffer fund One year of pension disbursements Without balance mechanism

12 The double entry bookkeeping indicators of financial balance developed for the Swedish NDC scheme

13 To get the net present value of pensions, contributions must be deducted from the expected flow of pensions Which flow of pensions? A. All individuals that at time of measurement have entered work force (closed group defi.) Which flow of contributions? Contributions from the same individuals B. During a 75 year period, as the US SSA does C. Infinite time horizon All contributions during the 75 years Infinite time horizon D. The flow of pensions that derive from pension credits accrued at the time of measurement. No contributions

14 Which discount factor? A. The expected capital market return? B. The expected growth in average income? C. The expected internal rate of return of the public pension system?

15 Imagine a defined contribution pension system, i.e. a pension system where A. The annual pension credit = annual contribution B. The return (indexation) of pension credit & pension benefit = internal rate of return of the system Defined Contribution Defined Benefit Contribution 16 % I II III IV Risk distribution PAYGO Funded What is the net present value of the pension liability of such a system? accumulated contributions + accumulated return - accumulated paid pensions = net present pension liability

16 More simply calculated as 1. The sum of the money value of notional accounts of the active population Remaining life expectancy of each retired age group Pension payments to each retired age group = Total net pension liability

17 The super simple, legislated, rule for calculating the Swedish pension liability (implicitly) implies that the: A: relevant pension flow is that which derive from pension credits already earned at the time of measurement B: internal rate of return of the public pension system is the relevant discount factor. C: notional pension capital and pensions are indexed at the same rate as the internal rate of return of the pension system. (Which is only true if and when the automatic balance mechanism is active.)

18 The defined contribution design eliminates - by definition - the need to consider the future, when estimating pension liability. Thus no projected cash flows, no assumed discount rate. This is equally true for a (true) NDC scheme as for a funded DC. WYSIWYG What You See Is What You Get

19 What did we get? Some real and big numbers Billions of SEK (1 Euro = 9 SEK) ATP liability to retirees ATP liability to active ATP liability to retirees ATP liability to active ATP liability to retirees ATP liability to active Inkomstpension liability to active Inkomstpension liability to active Inkomstpension liability to active GDP / 240 % / 244 % / 245 %

20 Does a PAYG pension system have Assets?

21 Balance Ratio Buffer fund Contribution? asset + PL Pension liability

22 Expected contributions & pensions Expected, money weighted average age of contributor average age of retiree Turnover duration contribution rate = index rule design age Pay-as-you-go

23 Expected Pension Liability Accrual of pension rights, new liability Pension payments, amortization of pension liability age

24 Expected Pension Liability Expected Contributions V few technical steps TD C

25 Volume V C TD > V TD C contributions V Structure pensions age TD

26 Expected Pension Liability Contribution asset V = C = 1 TD PV( contribution flow) System time preference

27 Pension Liability and the Fund Pension Liability Contribution Asset age Fund requirement

28 Balance Ratio Contribution asset Buffer fund (Margin) TD + C + F Fund requirement PL Pension liability

29 Fund 565 Contribution asset Surplus 218 ATP liability to retirees ATP liability to active Inkomstp. liability to active Fund 488 Contribution asset Surplus 52 ATP liability to retirees ATP liability to active Inkomstp. liability to active Fund 577 Contribution asset Surplus 58 ATP liability to retirees ATP liability to active Inkomstp. liability to active

30 Balance Ratios 2001 = 1, = 1, = 1,0097

31 Income Statement, in percent of GDP 2003 GDP, millions of SEK (1 Euro» 9 SEK) 2,440,058 Change in funded assets (a) Pension contributions 6.8 Pension disbursements -6.4 Return on funded capital 3.4 Costs of administration -0.1 Total change in funded capital (a) ,347, ,266, Change in contribution asset (b) Value of change in contribution revenue 6.6 Value of change in turnover duration 0.5 Total change in contribution asset (b) 7.1 Change in pension liability (c) New Pension credits and ATP points -7.1 Pension disbursements 6.4 Indexation -9.4 Value of change in life-expectancy -0.5 Inheritance gains arising 0.3 Inheritance gains distributed -0.3 Deduction for costs of administration 0.1 Total change in pension liability (c) Net income/ -loss (a)+(b)+(c)

32 Balance sheet of the Inkomstpension as a percent of GDP Assets Dec Dec Dec National Pension Funds Contribution asset Total assets Liabilities and surplus Opening surplus/-deficit Net income / -loss for the year Total (closing) surplus /-deficit Pension liability Total liabilities and surplus

33 Does measures matter?

34 Four stylised policy makers which one are you? 1 The publics perception of the policy makers knowledge of the future 0 Trusted false prophet Line of satisfied expectations Accountant Trusted true prophet Mistrusted true prophet 0 1 Policy makers Swedish position knowledge of the future

35 The end End