Tag Archives: Pension

Monetary Policy and the Wealth Distribution

In a Staff Working Paper, the Bank of England’s Philip Bunn, Alice Pugh, and Chris Yeates discuss how monetary policy easing following the financial crisis affected income and wealth of different age groups.

The authors analyze survey panel data (ONS Wealth and Assets Survey) on households’ characteristics and balance sheet positions. They argue that

the overall effect of monetary policy on standard relative measures of income and wealth inequality has been small. Given the pre-existing disparities in income and wealth, we estimate that the impact on each household varied substantially across the income and wealth distributions in cash terms, but in percentage terms the effects were broadly similar. We estimate that households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young. Overall, our results illustrate the importance of taking a broad-based approach to studying the distributional impacts of monetary policy and of considering channels jointly rather than in isolation.

Quill Cloud

Bankrupt US Public Sector Pension Schemes

In a Hoover Institution Essay, Joshua Rauh describes the extent to which US states and communities under fund public sector pensions.

Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference.

Despite the implementation of new Governmental Accounting Standards Board (GASB) guidelines, most public pension systems across the United States still calculate both their pension costs and liabilities under the assumption that their contributed assets will achieve returns of 7.5–8 percent per year.

But new GASB disclosures allow Rauh to estimate the size of the funding gap. He finds

unfunded accumulated benefits of $3.412 trillion under Treasury yield discounting. These are the unfunded debts that would be owed even if all plans froze their benefits at today’s promised levels.

Social Insurance in Switzerland

Information from the Swiss Federal Social Insurance Office on the social insurance system in Switzerland:

  • Brief Overview: HTML. Longer overview: PDF.
  • Social Insurance Accounts with links to data, in German (Schweizerische Sozialversicherungsstatistik): PDF.
  • Pocket statistics, in English: PDF. In German: PDF.

Chile’s Fully Funded Pension System

On Project Syndicate, Andres Velasco argues that one of the sources of the current problems with the Chilean pension system are the high fees charged by fund managers:

A government-appointed commission recently concluded that managers have generated high gross real returns on investments: from 1981 to 2013, the annual average was 8.6%; but high fees cut net returns to savers to around 3% per year over that period.

The commission’s report.

Discounting Pension Liabilities

In a recent NBER working paper (“Discounting Pension Liabilities: Funding Versus Value”), Jeffrey Brown and George Pennacchi discuss the appropriate choice of discount factor to discount pension liabilities. They conclude that it depends.

… if the objective is to measure pension under- or over- funding, a default-free discount rate should always be used, even if the liabilities are themselves not default-free. If, instead, the objective is to determine the market value of pension benefits, then it is appropriate that discount rates incorporate default risk.

… the use of a default-free discount rate is informative to participants who want to know how much money the plan would need to be assured that the plan will be able to pay promised benefits. This would also be a relevant measure if the plan wished to offload its liabilities to an insurance company that intends to make good on the future benefit payments.

… there are also cases for which the market value of the liability is important. Current or potential plan participants might want to know the market value of pension liabilities (rather than the promised value) when they are making decisions about the value of pension benefits…

… the market value of the liability can have odd properties as a system of funding measurement: specifically, the size of the total (funded plus unfunded) liability can vary with the degree of funding, and that funding levels asymptotically approach 100 percent as assets approach zero.

Brown and George Pennacchi also discuss how the appropriate discount rate may be measured and how cost-of-living adjustments may be accounted for.

The IMF on Greece vs. the Creditors

An iMFdirect blog post by Olivier Blanchard outlines the IMF’s perspective on the standoff between Greece and her official creditors. According to Blanchard, last week’s offer extended to Greece is realistic. On the part of the Greek government, it requires

truly credible measures to reach the lower target budget surplus … [and] … commitment to the more limited set of reforms.

On the part of the creditors, it requires

significant additional financing, and … debt relief sufficient to maintain debt sustainability. … debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.

Blanchard also explains why the IMF deems pension cuts unavoidable:

Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.

Blanchard recalls the 2012 agreement between Greece and her creditors:

Greece was to generate enough of a primary surplus to limit its indebtedness. It also agreed to a number of reforms which should lead to higher growth. In consideration, and subject to Greek implementation of the program, European creditors were to provide the needed financing, and provide debt relief if debt exceeded 120% by the end of the decade.

How will European governments, parliaments and taxpayers interpret the proviso “In consideration, and subject to Greek implementation of the program”?

IMF Recommendations for Switzerland

The concluding statement of the IMF mission to Switzerland (consultations under Article IV) includes the following top 5 recommendations:

  • Ease monetary policy further to help limit an expected slowdown in growth and reduce risks related to very low inflation.
  • To further support growth, allow fiscal automatic stabilizers to operate freely. If the downturn is more severe than expected, consider discretionary fiscal easing.
  • Adopt pension reform to ensure the sustainability of the safety net for future generations.
  • Raise banks’ minimum leverage ratio requirements to more ambitious levels to ensure banks have adequate capital to weather future shocks without recourse to public support.
  • Pay bank auditors from a FINMA-managed, bank-financed fund rather than by the bank that is being audited to avoid conflicts of interest.

The IMF also calls for an overhaul of the deposit insurance scheme. It sees three risks to its central scenario:

  • Risks related to low inflation.
  • Uncertainty about EU relations and immigration.
  • Global economic environment.

“Riskante Renten (Risky Entitlements),” FuW, 2013

Finanz und Wirtschaft, January 5, 2013. PDF. Ökonomenstimme, January 8, 2013. HTML.

  • Future pension benefits will reflect future national income, and how generations share it.
  • Future income depends on current savings and thus, the structure of the pension system.
  • How the income is shared depends on political factors, not promises.