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Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability

  • Auerbach, Alan J.
  • Lee, Ronald D

Around 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 ìNotional Defined Contributionî or ìNon-financial Defined Contributionî (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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Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt37k785qq.

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Date of creation: 02 Jan 2007
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Handle: RePEc:cdl:oplwec:qt37k785qq
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  1. Valdes-Prieto, Salvador, 2000. " The Financial Stability of Notional Account Pensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 395-417, June.
  2. Palmer, Edward, 2000. "The Swedish pension reform model : framework and issues," Social Protection Discussion Papers 23086, The World Bank.
  3. Florence Legros, 2003. "Notional Defined Contribution : a Comparison of the French and the German Point Systems," Working Papers 2003-14, CEPII research center.
  4. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-41, May.
  5. Lee, Ronald D., 1993. "Modeling and forecasting the time series of US fertility: Age distribution, range, and ultimate level," International Journal of Forecasting, Elsevier, vol. 9(2), pages 187-202, August.
  6. Ronald Lee & Shripad Tuljapurkar, 1998. "Stochastic Forecasts for Social Security," NBER Chapters, in: Frontiers in the Economics of Aging, pages 393-428 National Bureau of Economic Research, Inc.
  7. Valkonen, Tarmo, 2002. "Demographic Uncertainty and Taxes," Discussion Papers 816, The Research Institute of the Finnish Economy.
  8. AfDB AfDB, . "AfDB Group Annual Report 2004," Annual Report, African Development Bank, number 60 edited by Koua Louis Kouakou, 9.
  9. Legros, Florence, 2003. "Notional Defined Contribution : A Comparison of the French and the German Point Systems," Economics Papers from University Paris Dauphine 123456789/6478, Paris Dauphine University.
  10. Ronald D. Lee & Michael W. Anderson & Shripad Tuljapurkar, 2003. "Stochastic Forecasts of the Social Security Trust Fund," Working Papers wp043, University of Michigan, Michigan Retirement Research Center.
  11. Booth, Heather, 2006. "Demographic forecasting: 1980 to 2005 in review," International Journal of Forecasting, Elsevier, vol. 22(3), pages 547-581.
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