Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability
AbstractAround 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 iÌ€Notional Defined ContributioniÌ‚ or iÌ€Non-financial Defined ContributioniÌ‚ (NDC) has been created, with the objectives of addressing the fiscal instability of traditional plans and mimicking the haracteristics 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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Bibliographic InfoPaper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt37k785qq.
Date of creation: 02 Jan 2007
Date of revision:
Other versions of this item:
- Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters, in: Social Security Policy in a Changing Environment, pages 43-68 National Bureau of Economic Research, Inc.
- Alan J. Auerbach & Ronald Lee, 2006. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Working Papers 12805, National Bureau of Economic Research, Inc.
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
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