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

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

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

Expert Group on National Accounts. UNECE. Geneva, April 20107

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 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 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 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 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 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 People covered in 2005 …  Active population (thousands) Clases Pasivas: 938 (4,6%) Social Security:  Pensioners (thousands) Clases Pasivas: 515 (6,5%) Social Security: 7.395

Expert Group on National Accounts. UNECE. Geneva, April 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 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 similar models  Social Security  Government employer pension scheme

Expert Group on National Accounts. UNECE. Geneva, April 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 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 Case 2: Future pensions of active population  Sample of working lives (+/ 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 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 th will receive a disability pension with different ages from 18 to th will receive a widowhood pension by decease of the partner included both in the sample with different ages from 15 to th will not receive any benefit by decease without partner

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