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Decomposing Notional Defined-Contribution Pensions: Experience of OECD Countries' Reforms

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  • Edward R. Whitehouse

Abstract

This paper compares notional defined-contribution pension schemes (also known as notional accounts) with two alternative designs of earnings-related pension schemes: points systems and definedbenefit plans. It examines, in detail, four economic advantages of notional accounts that deliver retirement incomes in an equitable and economically efficient manner. The issue of equity arises in the treatment of people who draw their pensions at different ages and contribute for a different number of years. The issue of economic efficiency arises because pension systems can and do distort individual decisions to work and save. First, benefits are based on lifetime earnings, rather than a subset of “best” or “final” years’ pay. Secondly, an extra year’s contribution gives rise to an additional benefit. Thirdly, benefits are reduced to reflect the longer expected duration of payment for people who retire early and, similarly, increased for people who retire late. Finally, benefits are reduced as life expectancy increases, again to reflect the longer duration for which benefits would be paid. An analysis of OECD countries’ pension systems – of all different types – shows that most have already achieved most of these objectives, but without adopting notional accounts. Ce papier compare les systèmes de retraite à comptes notionnels avec deux systèmes alternatifs assis sur les salaires : les systèmes à points et les systèmes à cotisations définies. Il examine, en détail, quatre avantages économiques des comptes notionnels qui permettent de pourvoir des revenus de retraite dans une manière équitable et efficace du point de vue économique. La question de l'équité se présente dans le traitement de gens qui obtiennent leurs retraites aux âges différents et contribuent pendant des périodes différentes. La question de l'efficacité économique se présente parce que les systèmes de retraite peut et en faites déforment les décisions individuelles de travail et d’épargne. Premièrement, les avantages sont fondés sur les gains tout au long de la vie, au lieu d'un sous-ensemble de salaires de « meilleures » ou «dernières l » année de travail. Deuxièmement, le fait de cotiser pendant une année supplémentaire engendre une augmentation du montant du revenu de retraite. Troisièmement, les prestations de retraite sont réduites pour prendre en compte la plus longue durée sur laquelle s’étaleront les paiements pour les individus qui partent plus tôt à la retraite, et symétriquement elles sont augmentées pour les individus qui partent à la retraite plus tard. Enfin, les prestations de retraite sont réduites à l’augmentation de l’espérance de vie, pour prendre en compte une nouvelle fois la plus longue période sur laquelle les prestations de retraites seront versées. Une analyse des systèmes de retraite des pays de l'OCDE – de différents types – montre que la plupart de ceux-ci ont atteint ces objectifs, sans l’adoption d’un système à comptes notionnels.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Social, Employment and Migration Working Papers with number 109.

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Date of creation: 22 Oct 2010
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Handle: RePEc:oec:elsaab:109-en

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  1. Angelo Marano & Carlo Mazzaferro & Marcello Morciano, 2012. "The strengths and failures of incentive mechanisms in notional defined contribution pension systems," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 71(1), pages 33-70, October.

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