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On the feasibility of notional defined contribution systems: The German case

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  • Christina Benita Wilke

    (Munich Center for the Economics of Aging (MEA))

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    Abstract

    Notional defined contribution (NDC) systems have strongly been being debated in the worldwide pension literature in the past years. This paper deals with the feasibility of such NDC systems. The focus is on the German case, where the recent 2004 pension reform introduced a so-called sustainability factor, that de facto incorporates some crucial characteristics of an NDC system into the public pension system, but maintains the traditional benefit indexation formula approach. The paper analyzes the effects a hypothetical introduction of an NDC system would have on the financial situation of the German PAYG system. It is found that a genuine NDC system would be feasible in the sense that it would be financially possible and would achieve gross pension levels above, equal or only slightly below those that can be forecasted for the standard pensioner under the present German pension system. However, it is shown that an NDC system would require large buffer funds which are currently not available. Furthermore, the distribution of pension income among cohorts and across time would be very different and may be hard to motivate from a political perspective. Altogether, it becomes clear that an NDC system cannot solve the demographic problems but simply copes with them in a different way than conventional PAYG systems. Thus, it does not replace the necessity to supplement the public pension system by a funded second and third private pillar in order to prepare for the future demographic changes.

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    Bibliographic Info

    Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 08165.

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    Date of creation: 15 Sep 2008
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    Handle: RePEc:mea:meawpa:08165

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    1. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Working Paper Series 580, Research Institute of Industrial Economics.
    2. Axel Boersch-Supan & Christina B. Wilke, 2004. "The German Public Pension System: How it Was, How it Will Be," NBER Working Papers 10525, National Bureau of Economic Research, Inc.
    3. Agar Brugiavini & Vincenzo Galasso, 2003. "The Social Security Reform Process in Italy: Where do We Stand?," Working Papers wp052, University of Michigan, Michigan Retirement Research Center.
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    10. Florian Heiss, 2003. "Wie groß soll die Schwankungsreserve der gesetzlichen Rentenversicherung sein?," MEA discussion paper series 03033, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    11. Barbara Berkel & Axel Börsch-Supan, 2003. "Pension Reform in Germany: The Impact on Retirement Decisions," MEA discussion paper series 03036, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    12. Clemens, Johannes, 2006. "Anmerkungen zur geplanten Anhebung des gesetzlichen Rentenalters," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1998 - 2007), ZBW – German National Library of Economics / Leibniz Information Centre for Economics, vol. 86(3), pages 163-167.
    13. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    14. Disney, Richard, 1999. "Notional accounts as a pension reform strategy : an evaluation," Social Protection Discussion Papers 21302, The World Bank.
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