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Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability

In: Social Security Policy in a Changing Environment

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  • Alan J. Auerbach
  • Ronald Lee

Abstract

Around the world, Pay-As-You-Go (PAYGO) public pension programs face serious long-term fiscal problems due primarily to actual and projected population aging, and most appear unsustainable as currently structured. Some have proposed the replacement of such plans with systems of fully funded private or personal Defined Contribution (DC) accounts, but the difficulties of transition to funded systems have limited their implementation. Recently, a new variety of public pension program known as "Notional Defined Contribution" or "Non-financial Defined Contribution" (NDC) has been created, with the objectives of addressing the fiscal instability of traditional plans and mimicking the characteristics of funded DC plans while retaining PAYGO finance. Using different versions of the system recently adopted in Sweden, calibrated to US demographic and economic parameters, we evaluate the success of the NDC approach in achieving fiscal stability in a stochastic context. (In a companion paper, we will consider other aspects of the performance of NDC plans in comparison to traditional PAYGO pensions.) We find that the basic NDC scheme is effective at preventing excessive debt accumulation, but does little to prevent significant asset accumulation along many trajectories and on average. With adjustment, however, the NDC approach can be made more stable.

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This chapter was published in:

  • Jeffrey R. Brown & Jeffrey B. Liebman & David A. Wise, 2009. "Social Security Policy in a Changing Environment," NBER Books, National Bureau of Economic Research, Inc, number brow08-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 4533.

    Handle: RePEc:nbr:nberch:4533

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    1. Ronald Lee & Shripad Tuljapurkar, 1998. "Stochastic Forecasts for Social Security," NBER Chapters, in: Frontiers in the Economics of Aging, pages 393-428 National Bureau of Economic Research, Inc.
    2. Ronald D. Lee & Michael W. Anderson & Shripad Tuljapurkar, 2003. "Stochastic Forecasts of the Social Security Trust Fund," Working Papers, University of Michigan, Michigan Retirement Research Center wp043, University of Michigan, Michigan Retirement Research Center.
    3. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 237-41, May.
    4. Legros, Florence, 2003. "Notional Defined Contribution : A Comparison of the French and the German Point Systems," Economics Papers from University Paris Dauphine 123456789/6478, Paris Dauphine University.
    5. Florence Legros, 2003. "Notional Defined Contribution : a Comparison of the French and the German Point Systems," Working Papers 2003-14, CEPII research center.
    6. Palmer, Edward, 2000. "The Swedish pension reform model : framework and issues," Social Protection Discussion Papers 23086, The World Bank.
    7. Booth, Heather, 2006. "Demographic forecasting: 1980 to 2005 in review," International Journal of Forecasting, Elsevier, Elsevier, vol. 22(3), pages 547-581.
    8. Lee, Ronald D., 1993. "Modeling and forecasting the time series of US fertility: Age distribution, range, and ultimate level," International Journal of Forecasting, Elsevier, Elsevier, vol. 9(2), pages 187-202, August.
    9. AfDB AfDB, . "AfDB Group Annual Report 2004," Annual Report, African Development Bank, African Development Bank, number 60 edited by Koua Louis Kouakou, 9.
    10. Valkonen, Tarmo, 2002. "Demographic Uncertainty and Taxes," Discussion Papers, The Research Institute of the Finnish Economy 816, The Research Institute of the Finnish Economy.
    11. Valdes-Prieto, Salvador, 2000. " The Financial Stability of Notional Account Pensions," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 102(3), pages 395-417, June.
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    Cited by:
    1. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, Elsevier, vol. 95(1-2), pages 16-27, February.
    2. John Geanakoplos & Stephen P Zeldes, 2008. "Reforming Social Security with Progressive Personal Accounts," Levine's Working Paper Archive 122247000000002230, David K. Levine.
    3. Sánchez-Romero, Miguel & Sambt, Jože & Prskawetz, Alexia, 2012. "Quantifying the role of alternative pension reforms on the Austrian economy," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 04/2012, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    4. Lassila , Jukka & Valkonen, Tarmo, 2008. "Population ageing and fiscal sustainability in Finland: a stochastic analysis," Research Discussion Papers, Bank of Finland 28/2008, Bank of Finland.
    5. Alan Auerbach & Lorenz Kueng & Ronald Lee, 2013. "Propagation and Smoothing of Shocks in Alternative Social Security Systems," NBER Working Papers 19137, National Bureau of Economic Research, Inc.
    6. Bernardo Lanza Queiroz & Moema Gonçalves Bueno Figoli, 2011. "Population aging and the rising costs of public pension in Brazil," Textos para Discussão Cedeplar-UFMG td438, Cedeplar, Universidade Federal de Minas Gerais.
    7. Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2011. "Fiscal sustainability and policy rules under changing demographic forecasts," Discussion Papers, The Research Institute of the Finnish Economy 1265, The Research Institute of the Finnish Economy.
    8. Carlos Vidal-Meli� & María del Carmen Boado-Penas, 2013. "Compiling the actuarial balance for pay-as-you-go pension systems. Is it better to use the hidden asset or the contribution asset?," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(10), pages 1303-1320, April.
    9. Kobsak Pootrakool & Anak Serichetpong, 2007. "Safeguarding out Nation's Nest Egg: Necessary Reforms to our Social Security System," Working Papers 2007-05, Economic Research Department, Bank of Thailand.

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