Do Notional Defined Contribution Accounts Make Sense as Part of the Old-Age Security Mix for China?

Abstract

Until quite recently, the Chinese pension system was an enterprise-based, pay-as-you-go, defined benefit scheme. In 1995, the decision was made to shift to a multi-pillar scheme that included a second funded defined contribution pillar. The transition is proving difficult. This article outlines an alternative second pillar that may make more sense for China, a pay-as-you-go notional defined contribution (NDC) pillar. This article has three goals: (1) to provide a brief history of pension policy in China, (2) to describe the NDC model, and (3) to assess the relative merits of the NDC alternative as a possible option for China.