Nonfinancial Defined Contribution
Schemes in a Changing Pension
World
Eds.: Robert Holzmann, Edward Palmer & David Robalino
Edward Palmer
Swedish Social Insurance Agency
and Uppsala University
Outline of the Talk
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What is NDC
NDC Countries
The First Wave of NDC Reforms
- Paths to Reform
- NDC at Work
- Maintaining Financial Balance
What is NDC?
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Fixed contribution rate for all generations.
Individual contributions noted on personal
accounts.
Rate of return based on (nominal) covered per capita
wage & covered labor force growth.
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Life “annuity” based on individual’s account balance and
cohort (unisex) life expectancy at retirement + rate of return.
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Minimum pension age – but can work & contribute after
this age – part or full time.
Distinguishing micro features of NDC
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Individual accounts give transparency
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Intra-generational fairness
– They state clearly the individual’s claim on future consumption.
- Present value of a unit of contributions gives the same pension increment
for all – i.e., no tax wedge.
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Intergenerational fairness.
- All generations pay the same rate on earned income (and % of GDP) into
pensions.
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Transparent social policy through non-contributory rights
- e.g., for early years of childcare, periods with sickness, disability,
unemployment (financed with general revenues).
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Accounts can be shared between spouses/legal
partners.
-During the accumulation period and/or joint annuities can be created at
retirement.
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Accounts can be combined with other insurance
accounts
Distinguishing macro features of
NDC
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Financial sustainability
- achieved through the internal rate of return and
- integration of longevity changes into the pension
formula
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Labor supply incentives - Direct link between
contributions and benefits
- no tax wedge → neutral for labor supply decisions
- encourages labor force formality
- annuity construction provides an incentive to
postpone retirement with improving longevity
NDC Countries
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The First Wave Countries
- Italy 1995
- Latvia 1996
- Poland 1999
- Sweden 1999 (published model 1992, legislation
from 1994)
Other NDC countries
- Kyrgyzstan 1996 (for new entrants)
- Russia 2002
- Egypt 2013 (anthology chapter)
Other studies in the anthology with NDC focus:
- Chile, China (2 chapters), Greece, Uruguay
- Norway (implemented 2012 but didn’t go all the way)
The First Wave of NDC Reforms
Latvia, Italy, Poland & Sweden
Paths to Reform in Four Countries
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Different histories
Key issues: Separating disability (and survivor ?)
benefits from the NDC old age pension scheme
Retirement age(s)
- minimum age for an NDC benefit
- minimum age for a general budget financed
guarantee; age for conversion of disability to old age
Transition – which cohorts are covered by the new
scheme (overall reform strategy)
Administrative issues
- contribution collection; development of
administration; IT support; local office services; etc.
Communication of the reform to the public
NDC at Work in Four Countries
Latvia, Italy, Poland & Sweden
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Coverage
Integration with other pillars
Transition
Setting up individual accounts
- Notional rate of return
- Inheritance gains
- Social rights financed by general budget revenues
Annuities
- Denominator
- Indexation
Minimum pension guarantee (externally financed)
NDC in four countries - Individual
outcomes Based on the OECD pension models
Italy
Latvia Poland Sweden
0.30
0,99
1,08
0,96
1,04
0.50
0,75
0,80
0,74
0,79
0.75
0,75
0,80
0,75
0,67
1.00
0,75
0,77
0,75
0,64
1.50
0,77
0,73
0,75
0,81
2.50
0,78
0,70
0,77
0,88
Reduction of replacement rates of women
For 1-3 years spent on out of the formal labor
market with childcare.
1 year
2 years
3 years
Italy
-1,4%
-2,8%
-4,2%
Latvia
-1,8%
-3,6%
-4,2%
Poland
-0,8%
-1,7%
-2,5%
Sweden
-0,3%
-0,5%
-0,8%
Source. The OECD Pension Models.
Maintaining Long-Term Financial
Balance
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Choice of indexation
Allocation of the systematic
mortality risk in annuities
Creation of an NDC Bond
Balancing mechanism
2020
2040
2060
Change
2010-2060
15,3
14,5
15,6
14,4
-0,9
Latvia
9,7
7,3
6,3
5,9
-3,8
Poland
11,8
10,9
10,3
9,6
-2,2
Sweden
9,6
9,6
10,2
10,2
0,6
11,3
11,3
12,9
12,9
1,5
Country 2010
Italy
EU27
Source: 2012 Ageing Report, European Commission.
Thank you!