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The ABCs of Nonfinancial Defined Contribution (NDC) Schemes

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  • Holzmann, Robert

    () (University of New South Wales)

Abstract

Nonfinancial defined contribution (NDC) pension schemes have been successfully implemented since the mid-1990s in a number of European countries such as Italy, Latvia, Norway, Poland, and Sweden. The NDC approach features the lifelong contribution-benefit link of a financial defined contribution (FDC) personal account scheme, but is based on the pay-as-you-go format. At its start-up, the pay-as-you go commitments of the preceding defined benefit (DB) system are converted into individual personal accounts, allowing for a smooth transition from the DB to the DC format, while avoiding the very high transition costs inherent in a move from a traditional pay-as-you-go DB scheme to a fully funded FDC scheme. The NDC approach implemented by the rule book is able to manage the economic and demographic risks inherent to a pension scheme and by design creates financial sustainability. As in any pension scheme, the linchpin between financial stability and adequacy is the retirement age; in the NDC approach the individual retirement age above the minimum age is by design self-selected and by incentives should increase the effective retirement age in line with population aging. As a systemic reform approach NDC has become a strong competitor to piecemeal parametric reforms of traditional nonfinancial DB (NDB) schemes. While frequent, these reforms are far from transparent and usually too timid and too late to create financial sustainability while providing adequate pensions for the average contributor. This paper offers a largely nontechnical introduction to NDC schemes, their basic elements and advantages over NDB schemes, the key technical frontiers of the approach, and the experiences of NDC countries.

Suggested Citation

  • Holzmann, Robert, 2017. "The ABCs of Nonfinancial Defined Contribution (NDC) Schemes," IZA Policy Papers 130, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izapps:pp130
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    References listed on IDEAS

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    1. Nisticò, Sergio & Bevilacqua, Mirko, 2013. "Notional defined contribution (NDC) pension schemes and income patterns," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-24.
    2. Fornero, Elsa & Lo Prete, Anna, 2017. "Voting in the Aftermath of a Pension Reform: The Role of Financial Literacy," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201723, University of Turin.
    3. Bernd Genser & Robert Holzmann, 2016. "The Taxation of Internationally Portable Pensions: An Introduction to Fiscal Issues and Policy Options," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(1), pages 24-29, 05.
    4. Robert Holzmann & Edward Palmer, 2006. "Pension Reform : Issues and Prospects for Non-Financial Defined Contribution (NDC) Schemes," World Bank Publications, The World Bank, number 6983, July.
    5. repec:ces:ifodic:v:14:y:2016:i:1:p:19204327 is not listed on IDEAS
    6. Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications, The World Bank, number 7336, July.
    7. Bernd Genser & Robert Holzmann, 2016. "The Taxation of Internationally Portable Pensions: Fiscal Issues and Policy Options," CESifo Working Paper Series 5702, CESifo Group Munich.
    8. Fox, Louise & Palmer, Edward, 1999. "Latvian pension reform," Social Protection and Labor Policy and Technical Notes 20850, The World Bank.
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    More about this item

    Keywords

    systemic pension reform; unfunded; individual accounts; Sweden;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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