CRITERIA FOR SUSTAINABILITY OF OLD-AGE PENSION SYSTEM BASED ON THE NDC PRINCIPLES

Abstract

The topicality of the research subject. The foundations of the old-age pension scheme based on notional accounts, also referred to as the “notional defined contribution” or “non-financial defined contribution” (NDC) old-age pension scheme, were laid in Sweden in 1994, when the prevailing view was that a sustainable defined-contribution PAYG old-age pension scheme is impossible. Since then, the NDC system modifications have been implemented in several countries; since 2000, this scheme is also part of the Latvian pension system and works significantly better than the other part of the pension system - the funded pension scheme. However, the sustainability of NDC scheme is still being questioned. To prevent the NDC pension system sustainability problems, the authors (Pukis, M., & Dundure, I., 2012) in their publication “The Sustainability of the Pension System in Latvia” and (Dundure, I., 2015), the article “Sustainable Old-age Pension System by Developing Notional Defined Contribution Pension Scheme” have proposed a modified NDC model that provides sustainability of the pension system considering the known risks inherent in the pension system. The aim of the paper is to research and analyse the conditions for building a sustainable pension system by developing a Notional Defined Contribution pension scheme and working out an adjusted (modified) old-age pension calculation formula. In order to achieve the above mentioned aim, the authors set the following tasks: __Define the old-age pension system based on NDC principles; __Define the primary objectives of pension systems and perform analysis of pension adequacy; __Define the conditions for achieving a sustainable old-age pension system based on NDC principles; __Develop an adjusted (modified) old-age pension calculation formula based on NDC principles. In order to achieve the established aim and tasks, the following scientific research methods have been used in the work: analytical method, comparative method, logically and abstractedly constructive method. The analytical method and the comparative method are employed for conducting pension adequacy analysis and examination of pension capital indexation and indexation of pensions after retirement, as well as for the purpose of studying the Notional Defined Contribution pension system. The logically and abstractedly constructive method is employed for making forecasts and defining the main research results – the conditions for ensuring pension system sustainability that have been determined by the authors in the course of the research. The authors proved that by basing on the principle of generation solidarity and equity and through improvement of NDC pension calculation formula, it is possible to create the old-age pension system, which would be capable of excluding the old-age pension instability causes. DOI: http://dx.doi.org/10.5755/j01.eis.0.9.12798