The structure of pension systems varies by two key dimensions: the way in which benefits are determined and the way in which they are financed. The determination of benefits follows one of two main methods: (1) the defined benefit approach, in which benefits are based on a formula that relies on how much workers make and how long they work; and (2) the defined contribution approach, in which benefits are typically determined by the amount contributed and the accumulated earnings on those contributions. Pension financing also follows one of two general approaches: (1) pay-as-you-go, with contributions from current workers and their employers used to pay the pensions of current retirees; and (2) funded, with contributions invested in individual accounts that are used by workers to pay for their own retirement benefits. Today most national pension systems are based in large part on the defined benefit model and are financed on a pay-as-you-go basis. But as many of these schemes have matured and some of their limitations have emerged, policymakers have begun to search for alternatives. One alternative that has received a great deal of attention since the early 1980s is the funded defined contribution model of individual accounts. Another alternative emerged in the mid-1990s: the notional defined contribution (NDC) model. It also features individual accounts, but they are financed on a pay-as-you-go basis. This issue in brief draws on evidence from six countries that have introduced NDC schemes: Sweden (1994), Italy (1995), Latvia (1996), the Kyrgyz Republic (1997), Poland (1999), and Mongolia (2000). It describes the NDC model, reviews its major strengths and limitations, and assesses how widespread it may become in the future.
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Paper provided by Center for Retirement Research in its series Issues in Brief with number
ib24.
Find related papers by JEL classification: H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
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