The Fitness of Assumptions and an Alternative Model for Funding the Public Sector Pension Scheme: The Case of Rio Grande do Sul☆

Abstract

The research presented herein has two objectives. First, this study will test whether actuarial assumptions for public sector pension schemes in Brazil adhere to reality and whether changing these assumptions might affect the results, particularly with respect to life tables and wage growth assumptions. The paper shows that the best fit life table is AT 2000 for males aggregated by one year, which involves a longer life expectancy than the life table proposed under current legislation (IBGE 2009). The data also show that actual wage growth was 4.59% per year from 2002 to 2012, as opposed to the 1% wage increase proposed by the same legislation. Changing these two assumptions increases the actuarial imbalance for a representative individual by 18.17% after accounting for the adjusted life table or by 98.30% after revising the wage growth assumption. With respect to its second objective, this paper proposes alternative funding mechanisms in which the local pension scheme will provide the funded component of the benefit that would be complemented by local government in a pay-as-you-go manner. The database utilized was for the state of Rio Grande do Sul in the month of November 2011. The results are thus restricted to Rio Grande do Sul.