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The Financial Stability of Notional Account Pensions

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Author Info
Valdes-Prieto, Salvador

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Abstract

A number of European countries are reforming their pension benefit formulas by adopting "notional" accounts. These accounts are used to determine individual benefits, but pay-as-you-go financing is retained. This paper addresses the belief that by choosing adjustment rules cleverly, notional accounts can provide automatic financial equilibrium in the short run. If this were true, it would be a valuable advantage in terms of insulating the government budget from demographic pressures, while insulating the pension budget from fiscal pressures. It is shown that notional account benefit formulas cannot provide automatic financial equilibrium in the short run. The paper also suggests that if indexing rules are chosen in a particular way, and shocks revert rapidly to a mean, the pension institution may achieve financial stability in the long run. However, long-run stability is unlikely to be valuable because political interference occurs in the short run. Copyright 2000 by The editors of the Scandinavian Journal of Economics.

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Publisher Info
Article provided by Blackwell Publishing in its journal Scandinavian Journal of Economics.

Volume (Year): 102 (2000)
Issue (Month): 3 (June)
Pages: 395-417
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Handle: RePEc:bla:scandj:v:102:y:2000:i:3:p:395-417

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  1. Börsch-Supan, Axel, 2007. "Rational Pension Reform," Sonderforschungsbereich 504 Publications 07-25, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  2. Boado-Penas, Maria del Carmen / Valdés-Prieto, Salvador / Vidal-Meliá, Carlos, 2008. "The Actuarial Balance Sheet for Pay-As-You-Go Finance: Solvency Indicators for Spain and Sweden," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Markus Knell, 2004. "The Role of Revaluation and Adjustment Factors in Pay-As-You-Go Pension Systems," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 57-71, July. [Downloadable!]
  4. Markus Knell, 2005. "Demographic Fluctuations, Sustainability Factors and Intergenerational Fairness — An Assessment of Austrias New Pension System," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 23-42, April. [Downloadable!]
  5. Axel Börsch-Supan, 2007. "Rational Pension Reform," MEA discussion paper series 07132, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  6. John B. Williamson, 2001. "Future Prospects for Notional Defined Contribution Schemes," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(4), pages 19-24, October. [Downloadable!]
  7. Markus Knell, 2005. "On the Design of Sustainable and Fair PAYG Pension Systems When Cohort Sizes Change," Working Papers 95, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  8. Christina Benita Wilke, 2008. "On the feasibility of notional defined contribution systems: The German case," MEA discussion paper series 08165, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  9. Jukka Lassila & Tarmo Valkonen, 2001. "Ageing, Demographic Risks, and Pension Reform," Discussion Papers 765, The Research Institute of the Finnish Economy. [Downloadable!]
  10. Axel Börsch-Supan, 2003. "What are NDC Pension Systems? What Do They Bring to Reform Strategies?," MEA discussion paper series 03042, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  11. Axel Börsch-Supan, 2003. "What are NDC Pension Systems? What Do They Bring to Reform Strategies?," MEA discussion paper series 03042, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  12. Carlos Vidal-Meliá & Inmaculada Domínguez-Fabian, 2005. "The Spanish Pension System: Issues Of Introducing Notional Defined Contribution Accounts," Public Economics 0504006, EconWPA. [Downloadable!]
  13. John B. Williamson, 2004. "Assessing The Notional Defined Contribution Model," Issues in Brief ib2004-24, Center for Retirement Research, revised Oct 2004. [Downloadable!]
  14. Axel Börsch-Supan, 2004. "From Traditional DB to Notional DC Systems," MEA discussion paper series 04063, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  15. Góra, Marek & Palmer, Edward, 2004. "Shifting Perspectives in Pensions," IZA Discussion Papers 1369, Institute for the Study of Labor (IZA). [Downloadable!]
  16. András Simonovits, 2004. "Designing Benefit Rules for Flexible Retirement with or without Redistribution," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  17. Carlos Vidal-Meliá & Inmaculada Domínguez-Fabián & María del Carmen Boado-Penas, . "Notional Defined Contribution Accounts (NDCs): Solvency and Risk; Application to the Case of Spain," Studies on the Spanish Economy 226, FEDEA. [Downloadable!]
  18. John B. Williamson & Matthew Williams, 2004. "The Notional Defined Contribution Model: An Assessment Of The Strengths And Limitations Of A New Approach To The Provision Of Old Age Security," Working Papers, Center for Retirement Research at Boston College 2003-18, Center for Retirement Research. [Downloadable!]
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