Notional Defined Contribution Accounts (NDCs): Solvency and Risk; Application to the Case of Spain
The aim of this work is twofold, on the one hand, to demonstrate the actuarial imbalance of the Spanish pension system in its current configuration, and on the other, to measure the aggregate economic risk to which the pensioner would be exposed if it were decided to apply ten formulas for the calculation of the retirement pension based on notional accounts. Given the uncertainty involved in working with a long term horizon, a model of generation of multi-periodic scenarios is used, based on the predictions of mean values of Alonso and Herce (2003) for the period 2006-2050. This provides up to ten thousand trajectories of the macroeconomic indices needed to calculate such parameters as the initial pension, the replacement rate (RR) or the internal rate of return (IRR), and the value-at-risk (VaR) of the pensioner. The results obtained are analyzed in both objective and subjective terms. The main conclusions are that, applying the notional philosophy, the expected average RR and IRR would be much lower than those obtained under the current rules of the pay-as-you-go system. If the projections used were slightly probable, the pension system would build up such a large additional financial imbalance in the future that it would require either a considerable reduction in the initial pension or a severe combination of parameter adjustments. From the risk perspective, the preferred formulas for a beneficiary most averse would be those based on future variations in salaries with a pension constant in real terms, whereas those beneficiaries less averse to risk would prefer formulas supplying a lower initial pension which grows in real terms in line with future variations in salaries.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edward Palmer, 1999. "Exit from the Labor Force for Older Workers: Can the NDC Pension System Help?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 24(4), pages 461-472, October.
- Peter Diamond, 2005. "Pensions for an Aging Population," NBER Working Papers 11877, National Bureau of Economic Research, Inc.
- Nicholas Barr & Peter Diamond, 2006. "The Economics of Pensions," Oxford Review of Economic Policy, Oxford University Press, vol. 22(1), pages 15-39, Spring.
- Agar Brugiavini & Franco Peracchi, 2007.
"Fiscal Implications of Pension Reforms in Italy,"
NBER Chapters,in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 253-294
National Bureau of Economic Research, Inc.
- Agar Brugiavini & Franco Peracchi, 2005. "Fiscal Implications of Pension Reforms in Italy," CEIS Research Paper 67, Tor Vergata University, CEIS.
- Agar Brugiavini & Franco Peracchi, 2008. "Fiscal Implications of Pension Reforms in Italy," Working Papers 2008_30, Department of Economics, University of Venice "Ca' Foscari".
- Settergren, Ole & Mikula, Boguslaw D., 2005. "The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 115-138, July.
- Settergren, Ole & Mikula, Boguslaw D., 2005. "The Rate of Return of Pay-As-You-Go Pension Systems: A More Exact Consumption-Loan Model of Interest," Discussion Paper 249, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
- Ranguelova, Elena & Feldstein, Martin, 2001. "Individual Risk in an Investment-Based Social Security System," Scholarly Articles 2797440, Harvard University Department of Economics.
- Assar Lindbeck & Mats Persson, 2003.
"The Gains from Pension Reform,"
Journal of Economic Literature,
American Economic Association, vol. 41(1), pages 74-112, March.
- Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Working Paper Series 580, Research Institute of Industrial Economics.
- Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
- Martin Feldstein & Elena Ranguelova, 2001.
"Individual Risk in an Investment-Based Social Security System,"
American Economic Review,
American Economic Association, vol. 91(4), pages 1116-1125, September.
- Martin Feldstein & Elena Ranguelova, 2001. "Individual Risk in an Investment-Based Social Security System," NBER Working Papers 8074, National Bureau of Economic Research, Inc.
- Carlos Vidal-Meliá & Inmaculada Domínguez-Fabian, 2005. "The Spanish Pension System: Issues Of Introducing Notional Defined Contribution Accounts," Public Economics 0504006, EconWPA.
- Javier Alonso Meseguer & José A. Herce, "undated". "Balance del sistema de pensiones y boom migratorio en España. Proyecciones del modelo MODPENS de FEDEA a 2050," Working Papers 2003-02, FEDEA.
- Namkee Ahn & Javier Alonso-Meseguer & Juan Ramón García, "undated". "A Projection of Spanish Pension System under Demographic Uncertainty," Working Papers 2005-20, FEDEA.
- Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
- Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-317, June.
- Carlos Vidal-Meliá & Inmaculada Domínguez-Fabián & José Enrique Devesa-Carpio, 2006. "Subjective Economic Risk to Beneficiaries in Notional Defined Contribution Accounts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(3), pages 489-515.
- Salvador Valdés-Prieto, 2005. "Securitization of taxes implicit in PAYG pensions," Economic Policy, CEPR;CES;MSH, vol. 20(42), pages 215-265, April.
- Valdes-Prieto, Salvador, 2000. " The Financial Stability of Notional Account Pensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 395-417, June.
When requesting a correction, please mention this item's handle: RePEc:fda:fdaeee:226. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carmen Arias)
If references are entirely missing, you can add them using this form.