Expert Group on National Accounts

1. Agenda item 5 Expert Group on National Accounts Measuring and recording of pensions Modelling and estimating social security pension entitlements in Spain by Alfredo Cristobal alfredo.cristobal@ine.es Director of National Accounts and Employment (INE) UNECE. Geneva, 27th April 2010

2. Contents • Introduction • Pension Schemes sponsored by General Government in Spain • Model for estimating household future pension entitlements Expert Group on National Accounts. UNECE. Geneva, April 2010

3. Contents • Introduction • Pension Schemes sponsored by General Government in Spain • Model for estimating household future pension entitlements Expert Group on National Accounts. UNECE. Geneva, April 2010

4. Increase of the population longevity (+ or – 6 years till 2048) • Moderate birth rates • Gradual ageing in the demographic structure Expert Group on National Accounts. UNECE. Geneva, April 2010

5. Same case for people over 65 Expert Group on National Accounts. UNECE. Geneva, April 2010

6. Population aged over 65: Is set to double in 40 years 32% of the total population Expert Group on National Accounts. UNECE. Geneva, April 2010

7. Expert Group on National Accounts. UNECE. Geneva, April 2010

8. Accrued-to-date pension entitlements • To estimate the impact of these entitlements in Pay-As-You-Go (unfunded) schemes • In principle, should not be included in core accounts (implicit, no real liability)  supplementary table • Narrow measure. By themselves, they are not an indicator of sustainability of public finance • To add flows • To estimate the expected expenditure of government (AWG) • Substantial amount (two-times GDP or more) • Capacity of government to meet this cost. Government decides … • Retirement age • Period to be considered for pension calculations • Others … Expert Group on National Accounts. UNECE. Geneva, April 2010

9. Estimates • CMFB Task Force (Spain attended: NSI and Central Bank) • Supplementary table • Working group at domestic level chaired by NSI • National model • Data for 2005 to 2008 (flows and stocks) Expert Group on National Accounts. UNECE. Geneva, April 2010

10. Contents • Introduction • Pension Schemes sponsored by General Government in Spain • Model for estimating household future pension entitlements Expert Group on National Accounts. UNECE. Geneva, April 2010

11. Spain: two pension schemes sponsored by GG • Government Employer social security scheme for officials belonging to the so called Administracion General del Estado (Clases Pasivas) • Social security scheme for the rest of workers Expert Group on National Accounts. UNECE. Geneva, April 2010

12. Clases Pasivas • Officials from … • Central Government • Army, Justice, Law Courts • Public universities related to the State • Those officials initially belonging to Central Government and currently working in the State Government (Regional) after transferring powers • Ex-presidents, vice-presidents and ministers Expert Group on National Accounts. UNECE. Geneva, April 2010

13. Similarities • People obliged by law to participate. No personal election • Risk exposure (borne by GG in both cases) • Legal framework • Funding (both unfunded) • Ability of GG to change the conditions or the benefit formula • No duplicity: if pension entitlements for both schemes have been accumulated, choose one of them Expert Group on National Accounts. UNECE. Geneva, April 2010

14. People covered in 2005 … • Active population (thousands) • Clases Pasivas: 938 (4,6%) • Social Security: 19.325 • Pensioners (thousands) • Clases Pasivas: 515 (6,5%) • Social Security: 7.395 Expert Group on National Accounts. UNECE. Geneva, April 2010

15. Contents • Introduction • Pension Schemes sponsored by General Government in Spain • Model for estimating household future pension entitlements Expert Group on National Accounts. UNECE. Geneva, April 2010

16. Domestic Working Group • Ministry of Labour and Social Affairs • Social Security Treasury • Ministry of Finance • Audit Office of the General Government • Central Bank • National Statistical Institute (chair) Expert Group on National Accounts. UNECE. Geneva, April 2010

17. 2 similar models • Social Security • Government employer pension scheme Expert Group on National Accounts. UNECE. Geneva, April 2010

18. Social Security: Model • Just contributory pensions • Retirement pensions • Retirement by disability • Disability allowance • Widowhood • Orphanage • Social contributions are not fully related with pensions • Individuals • Active population (currently paying social contributions not having generated a pension yet) • Current pensioners • Total of pension entitlements = • + Pensions of existing pensioners (case 1) • + Future pensions of current active population (case 2) Expert Group on National Accounts. UNECE. Geneva, April 2010

19. Case 1: Already existing pensions • Number of pensions * average amount of contributory pension • Type of pension, sex, age of birth • Actuarial techniques • Assumptions on • Revaluations • Life expectancy • Discount rate • Present value of the pension entitlements Expert Group on National Accounts. UNECE. Geneva, April 2010

20. Case 2: Future pensions of active population • Sample of working lives (+/- 800.000 individuals) Stochastic model + assumptions • Pension generated by each individual in the sample (type, date, amount) Grossing up factors (+ or – by 25) • Pensions generated by whole active population Expert Group on National Accounts. UNECE. Geneva, April 2010

21. Sample of working lives • Target population: almost 30 million • Sample size: 1,2 million (+- 4%) • Of these, 835 th active population • Distribution (random draw) • 607 th will receive a retirement pension with different ages from 50 to 99 • 154 th will receive a disability pension with different ages from 18 to 66 • 63 th will receive a widowhood pension by decease of the partner included both in the sample with different ages from 15 to 73 • 11 th will not receive any benefit by decease without partner Expert Group on National Accounts. UNECE. Geneva, April 2010

22. Sample of working lives. For each individual • Number of days paying social contributions to Social Security • Average contributions base (salaries) • Simulation process (stochastic model and assumptions) • Future salaries (PBO) • Frequency of death, invalidity and retirement estimated by age and sex • Unit Credit Method: • Time individual paying contributions / total expected working life • Future pension Expert Group on National Accounts. UNECE. Geneva, April 2010

23. Assumptions related to the benefits • No retirement under the age of 50 • Retirement by disability: All people at 65 • Disability: No cases under 16 • Widowhood: No cases under 16 • Orphanage: All cases from 0 to 21 Expert Group on National Accounts. UNECE. Geneva, April 2010

24. Assumptions related to the valuation • Demographic tables (men, women) till 100 years (NSI) • Social security records  invalidity pensioners • Salary increase: +1,8% real terms • PBO • Discount rate: 3% real terms (same used in AWG works) • Inflation rate: 2% • Age difference between married couples: 3 years • Marriage rate of pensioners: 92% • Instalments: 12 payments • Reversion in case of widowhood: 60% pension • Orphan income  until age of 22 Expert Group on National Accounts. UNECE. Geneva, April 2010

25. Outcome (2005) • Total entitlements: 2,19 trillion euro • GDP: 0,91 trillion euro • Ratio: 2,41 times • Similar rations in 2006 to 2008 • 90% Social Security and 10% government employer pension scheme Expert Group on National Accounts. UNECE. Geneva, April 2010

26. Expert Group on National Accounts Measuring and recording of pensions Modelling and estimating social security pension entitlements in Spain by Alfredo Cristobal alfredo.cristobal@ine.es Director of National Accounts and Employment (INE) UNECE. Geneva, 27th April 2010