Angelo Marano

Equity and adequacy in notional defined contribution pension systems. Problems and solutions

  • Abstract

Informations and abstract

Keywords: Pension Systems; Notional Defined Contribution Systems; Notional Pension Accounts; Pension Incentives; Social Assistance Pensions.

During the 1990s, growing pressure for pension reform emerged in most industrialized countries. Notional defined contribution (NDC) systems emerged as an excellent reform option because by mimicking private saving, they would introduce actuarial equity and incentive neutrality. Further, the drop and automatic adjustment of benefits to contribution flows would guarantee financial sustainability within the pay-as-you-go system, with no need to fund pension liabilities. However, a number of issues remain unsolved. Demographic trends differ from earlier projections, and the expected population drop did not take place. Moreover, when social assistance is also taken into consideration, regressive features emerge in NDCs, which undermine actuarial equity and incentive neutrality. This shortcoming is even more relevant as NDCs are expected to reduce benefits, which would not only trigger adequacy problems, but also narrow the gap between social assistance and social insurance pensions. Indeed, NDCs need high wages, high contribution rates and long and uninterrupted working careers, which is not what the labor market currently offers. To address these issues the paper envisages either strengthening imputed social contributions or turning social assistance pensions into a universal benefit, which would add to current social insurance benefits. Both options imply a different allocation of the pension financing burden between fiscal and contributory revenues, while not necessarily requiring increased expenditures above current levels.

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