The ABCs of nonfinancial defined contribution (NDC) schemes

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in The ABCs of Nonfinancial Defined Contribution (NDC) Schemes August 2017Any opinions expressed in this paper are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but IZA takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The IZA Institute of Labor Economics is an independent economic research institute that conducts research in labor economics and offers evidence-based policy advice on labor market issues. Supported by the Deutsche Post Foundation, IZA runs the world's largest network of economists, whose research aims to provide answers to the global labor market challenges of our time. Our key objective is to build bridges between academic research, policymakers and society. IZA Policy Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. link of a financial defined contribution (FDC) personal account scheme, but is based on the pay-as-you-go format. At its start-up, the pay-as-you go commitments of the preceding defined benefit (DB) system are converted into individual personal accounts, allowing for a smooth transition from the DB to the DC format, while avoiding the very high transition costs inherent in a move from a traditional pay-as-you-go DB scheme to a fully funded FDC scheme. The NDC approach implemented by the rule book is able to manage the economic and demographic risks inherent to a pension scheme and by design creates financial sustainability. As in any pension scheme, the linchpin between financial stability and adequacy is the retirement age; in the NDC approach the individual retirement age above the minimum age is by design self-selected and by incentives should increase the effective retirement age in line with population aging. As a systemic reform approach NDC has become a strong competitor to piecemeal parametric reforms of traditional nonfinancial DB (NDB) schemes. While frequent, these reforms are far from transparent and usually too timid and too late to create financial sustainability while providing adequate pensions for the average contributor. This paper offers a largely nontechnical introduction to NDC schemes, their basic elements and advantages over NDB schemes, the key technical frontiers of the a...

A Social Insurance Accounting for a Notional Defined Contribution Scheme Combining Retirement and Long-Term Care Benefits

“…An NDC pension scheme is a PAYG pension plan that mimics a funded defined contribution plan [47][48][49]. An NDC scheme works in much the same way as ordinary savings in the bank.…”

The Notional and the Real in China’s Pension Reforms

“…The NDC paradigm is well explained byAyuso, Bravo, and Holzmann (2016),Barr and Diamond (2011),Boskin, Kotlikoff, and Shoven (1988), Holzmann (2017),Holzmann and Hinz (2005),Holzmann and Palmer (2012),Holzmann (2017), andLu and Piggott (2008). It is not further elaborated here.…”

Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

“…Therefore, many countries have adapted different reforms in order to restore the financial sustainability. Among these strategies, the NDC mechanism has been proposed as a credible alternative (Gronchi and Nisticò 2006;Holzmann 2017).…”

“…Undoubtedly, NDC has many important advantages with respect to classical DB schemes (Holzmann 2017). From an individual point of view, NDCs can be considered as actuarially fair because of the direct link between the contributions and the pension paid after retirement (Palmer 2006) and the DC nature should induce financial sustainability on a long-term basis.…”