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Notional defined contribution pensions with public reserve funds in ageing economies: An application to Japan

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  • Bei Lu
  • Olivia S. Mitchell
  • John Piggott

Abstract

Several developed and developing countries have recently adopted a notional defined contribution (NDC) approach to old‐age pension reform. The NDC is essentially a non‐pre‐funded defined contribution retirement system, in which contributions are credited with a “rate of return” related to aggregate payroll growth, and individual account accruals are maintained in a book‐keeping system. Payouts are annuitized based on the expected mortality of each succeeding retiring cohort. NDC plans may be identified with appropriately calibrated Pay‐As‐You‐Go plans in demographic equilibrium, but the two paradigms diverge when demographic shift is introduced. This paper investigates the key actuarial and economic implications of alternative NDC rules, with a particular focus on Japan, the world's most rapidly ageing economy. We examine the potential role for pension reserves in transitioning to an NDC system, and we show these can be used to smooth the impact of demographic transition to an older society. Finally, we show that countries such as Japan could elect to use pension reserves accumulated in the past to facilitate the transition to an NDC system.

Suggested Citation

  • Bei Lu & Olivia S. Mitchell & John Piggott, 2008. "Notional defined contribution pensions with public reserve funds in ageing economies: An application to Japan," International Social Security Review, John Wiley & Sons, vol. 61(4), pages 1-23, October.
  • Handle: RePEc:wly:intssr:v:61:y:2008:i:4:p:1-23
    DOI: 10.1111/j.1468-246X.2008.00321.x
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    Cited by:

    1. Hind El-Houjjaji & Abdellah Echaoui, 2020. "Notional Defined Contribution Accounts: An Application To Morocco," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 25, pages 93-108, June.
    2. Alonso-García, J. & Devolder, P., 2016. "Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 224-236.

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