Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-27T11:01:53.341Z Has data issue: false hasContentIssue false
  • English
  • Français

Non-DC notional accounts: relaxing the trade-off between fairness and solvency of pay-as-you-go pension systems

Published online by Cambridge University Press:  08 October 2020

Sergio Nisticò Open the ORCID record for Sergio Nisticò [Opens in a new window]
Sergio Nisticò*
Affiliation:
Department of Economics and Law, University of Cassino and Southern Lazio, Cassino, FR, Italy
*
Corresponding author. Email: s.nistico@unicas.it
Get access Rights & Permissions [Opens in a new window]

Abstract

Existing pay-as-you-go (PAYG) schemes based on notional accounts (NAs) have chosen the defined-contribution (DC) setting that forces the rate of interest credited to all individual accounts to change over time to ensure solvency. On the other hand, volatility of the rate of interest is the source of non-negligible disparities of individual internal rates of return (IRRs) both within and across generations. It is argued that these disparities represent a threat to the political appeal of PAYG DC systems, in particular in the present situation characterized by low growth rates of the contribution base. The paper uses a four-overlapping-generations model to prove that the DC setting is not a necessary ingredient of NAs and that their political appeal could be enhanced by extending their use to non-DC pension systems. In fact, redistributions can be avoided by crediting all individual accounts with a constant rate of interest while ensuring financial solvency by fine-tuning of the contribution rate to make the system's revenues grow at the same (constant) rate credited to all accounts. The proof requires constancy of the employment growth rate but not of average earnings. Changes in the employment growth rate produce small oscillations around perfect balance between contribution revenue and pension expenditure manageable with a small buffer fund.

Keywords

Intergenerational fairnessNDC pension systemsnotional accountssolvency

JEL classification

H55: Social Security and Public Pensions J26: Retirement • Retirement Policies
Type
Article
Information
Journal of Pension Economics & Finance , Volume 21 , Issue 2 , April 2022 , pp. 168 - 190
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aaron, H (1966) The social insurance paradox. The Canadian Journal of Economics and Political Science/Revue Canadienne d'Economique et de Science Politique 32, 371–374.Google Scholar
Buchholtz, S, Chłon-Dominczak, A and Góra, M (2019) The polish NDC scheme: Success in the face of adversity. In Holzmann, R, Palmer, E, Robalino, D and Sacchi, S (eds), Progress and Challenges of Nonfinancial Defined Contribution Pension Scheme (Vol. 1: Addressing Marginalization, Polarization, and the Labor Market). Washington, D.C.: The World Bank, pp. 91–117.Google Scholar
Chłoń-Domińczak, A, Franco, D and Palmer, E (2012) The first wave of NDC reforms: The experiences of Italy, Latvia, Poland, and Sweden. In Holzmann, R, Palmer, E and Robalino, D (eds), Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World (Vol. 1: Progress, Lessons and Implementation. Washington, D.C.: The World Bank, pp. 31–84.CrossRefGoogle Scholar
Christensen, AM, Fredriksen, D, Lien, OC and Stølen, NM (2012) Pension reform in Norway: Combining an NDC approach and distributional goals. In Holzmann, R, Palmer, E and Robalino, D (eds), Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World (Vol. 1: Progress, Lessons, and Implementation. Washington, D.C.: The World Bank, pp. 129–154.CrossRefGoogle Scholar
Disney, R (2004) Are contributions to public pension programmes a tax? Economic Policy 19, 267–311.CrossRefGoogle Scholar
European Commission (2018) The 2018 Ageing Report. Underlying Assumptions & Projection Methodologies. Directorate-General for Economic and Financial Affairs, Directorate-General for Economic and Financial Affairs. Brussels: European Union.Google Scholar
Galasso, V (2006) The Political Future of Social Security in Aging Societies. Cambridge, MA: The MIT Press.CrossRefGoogle Scholar
Gronchi, S and Nisticò, S (2006) Implementing the NDC theoretical model: a comparison of Italy and Sweden. In Holzmann, R and Palmer, E (eds), Pension Reform: Issues and Prospects for Non-Financial Defined Contribution (NDC) Schemes (Chapter 19). Washington, DC: World Bank, pp. 493–515.Google Scholar
Gronchi, S and Nisticò, S (2008) Theoretical foundations of pay-as-you-go defined-contribution pension schemes. Metroeconomica 58, 131–159.CrossRefGoogle Scholar
Gronchi, S, Nisticò, S and Bevilacqua, M (2019) The Italian NDC scheme: Evolution and remaining potholes. In Holzmann, R, Palmer, E, Palacios, R and Sacchi, S (eds), Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes (vol. 1). Washington, D.C.: The World Bank, pp. 73–89.Google Scholar
Gurtovaya, V and Nisticò, S (2018) The notional defined contribution pension scheme and the German ‘point system’: a comparison. German Economic Review 19(4), 365–382.CrossRefGoogle Scholar
Gurtovaya, V and Nisticò, S (2019) Does the NDC scheme mimic the French point system? Applied Economics 51(1), 117–130.CrossRefGoogle Scholar
ISTAT (2019) Redditi da Lavoro Dipendente e Componenti per Branca di Attività. Conti Nazionali. Conti e Aggregati Economici Nazionali Annuali. Roma: Istat.Google Scholar
Jones, R (1914) The Nature and First Principle of Taxation. London: P. S. King & Son.Google Scholar
Musgrave, RA (1981) A reappraisal of social security financing. In Skidmore, F (ed.), Social Security Financing. Cambridge, MA: The MIT Press, pp. 89–127.Google Scholar
Nisticò, S (2019) Essentials of Pension Economics. Cham: Palgrave Pivot.CrossRefGoogle Scholar
Nisticò, S and Bevilacqua, M (2018) Some notes on the redistribution inherent in the US public pension system. Contemporary Economic Policy 36(3), 566–581.CrossRefGoogle Scholar
Palmer, E and Stabina, S (2019) The Latvian NDC scheme: Success under a decreasing labor force. In Holzmann, R, Palmer, E, Robalino, D and Sacchi, S (eds), Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes (Vol. 1: Addressing Marginalization, Polarization, and the Labor Market). Washington, D.C.: The World Bank, pp. 51–72.Google Scholar
Pensions Myndigheten (2018) Orange Report 2017. Annual Report of the Swedish Pension System. Stockholm.Google Scholar
Samuelson, PA (1958) An exact consumption-loan model of interest with or without the social contrivance of money. Journal of Political Economy 66(6), 467–482.CrossRefGoogle Scholar
Settergren, O (2003) Financial and inter-generational balance? An introduction to how the new Swedish pension system manages conflicting ambitions. Scandinavian Insurance Quarterly 2, 99–114.Google Scholar
Settergren, O (2004) New Use of an Old Italian Invention: The double-entry bookkeeping used to monitor and secure financial stability of the new Swedish pay-as-you-go pension plan. Discussion Paper (233). Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University, pp. 1–15.Google Scholar
Settergren, O and Mikula, D (2006) The automatic balance mechanism of the Swedish pension system. Journal of Pension Economics and Finance 4(2), 115–138.CrossRefGoogle Scholar
Valdés-Prieto, S (2000) The financial stability of notional account pensions. Scandinavian Journal of Economics 102(3), 395–417.CrossRefGoogle Scholar