Is an Increase in the Minimum Retirement Age Always Desirable? The Case of Notional Defined Contribution Systems

Abstract

International audienceSeveral countries have recently introduced reforms that aim to increase the neutrality of their pension system by introducing an incentives-disincentives mechanism or by replacing their traditional defined-benefit system with a Notional Defined Contribution method. This paper evaluates the financial effects of an increase in the minimum retirement age in countries where a Notional Defined Contribution system exists. We show that such a reform produces a positive effect on the financial situation of the pension system (by generating surpluses or by reducing deficits) in the short and in the medium run, but it becomes completely ineffective in the long run. This result implies that in countries where the pension system is sufficiently neutral such a reform is not appropriate to solve the problem of population ageing which is a long-run problem

Extending the Retirement Age for Preserving the Costitutive Pension System Mission

“…Up to now, however, on this specific point no general agreement emerges. Some authors maintain that this measure should be an essential part of pension reform that would reduce the long-run deficit (Magnani, 2016; American Academy of Actuaries, 2010; Liebman, MacGuineas and Samwick, 2005;Poole, 2004;Cremer, Lozachmeur and Pestieau, 2006;Pestieau, 2004). Others claim that it is a dispensable policy option (Diamond 2005b(Diamond , 2005cDiamond, Orszag, 2004).…”

The effects of aging on notional defined contribution pension systems: A theoretical investigation

“…Second, the implemented NDC mechanism differs from the pure theoretical version since (a) the indexation is usually related to the rate of growth of GDP instead of wages; (b) the survival rates are not properly updated; and (c) the transition from DB to DC takes time. Furthermore, although aging is a fundamental driver of social security balance, the properties of the NDC system when the survival rates are not constant are usually addressed through simulations (see Magnani, ), whereas there is a lack of closed analytical solutions. This paper aims to fill this gap by providing a theoretical framework that explores the analytical properties of NDC systems in the context of aging.…”

A note on “raising the mandatory retirement age and its effect on long‐run income and Pay As You Go (PAYG) pensions”

“…Constructing an OG model with endogenous growth, Fanti () showed that raising mandatory retirement age has negative impact on economic growth and pension sustainability. Magnani () investigated the financial effect of an increase in the retirement age in an economy with a Notional Defined Contribution pension system and showed that such a change does not improve the financial situation of the pension system in the long run.…”