What are NDC Pension Systems? What Do They Bring to Reform Strategies?

This paper has two parts. Part 1 presents the basic ideas underlying notional defined contribution (NDC) systems and discusses their main advantages and disadvantages. We argue that a NDC system is mainly a political device. It makes parametric reform, badly needed to stabilize the pay-as-you-go (PAYG) pillars all over the World, easier because it exposes the trade-offs and clarifies concepts. It may also change the microeconomics of labor supply and savings. It does not, however, change the macroeconomics of PAYG systems and thus does not substitute for the introduction of pre-funded second and third pillars. NDC systems can be installed as individual account systems, as done most prominently in Sweden. However, they can also be mimicked by a set of rules in a conventional defined benefits PAYG system, showing that NDC systems are more a political than economic devices. Part 2 describes how the German pension reform proposals made in late summer 2003 effectively introduce a NDC system without explicit NDC-type accounting. Address: Mannheim Research Institute for the Economics of Aging, (MEA), Department of Economics, Mannheim University L13,17 D-68131 Mannheim, Germany e-mail: [email protected] Acknowledgements: This paper has been written for the World Bank – RFV Conference on NDC Pensions in Sandhamn, Sweden, September 29-30. It takes as point of departure and owes much intellectual debt to Richard Disney’s 1999 paper. This paper has profited from his as well as Anette Reil-Held’s and Christina Wilke’s comments, and from the lively discussion during and after the Sandhamn conference. My special thanks go to Nick Barr, Peter Diamond, Anna Hedborg, Robert Holzmann, Assar Lindbeck, Ed Palmer, Michal Rutkowski and Salvador Valdes Prieto. The German National Science Foundation (DFG) and the Gesamtverband der Deutschen Versicherungswirtschaft (GDV) provided additional financial support. The usual disclaimer applies.