Abstract
AbstractThe use of a gender-neutral annuity divisor introduces an intra-generational redistribution from short-lived towards long-lived individuals; this entails a transfer of wealth from males to females and from low socioeconomic groups to high socioeconomic groups. With some subpopulations consisting of females from low socioeconomic groups (or males from high groups), the net effect of the redistribution is unclear. The study aims to quantify the lifetime income redistribution of a generic NDC system using two types of divisor – the demographic and the economic – to compute the amount of an initial pension. With this in mind, the redistribution (actuarial fairness) among subpopulations is assessed through the ratio between the present value of expected pensions received and contributions paid. We find that all subgroups of women and men with high educational attainment benefit from the use of the unisex demographic divisor. This paper also shows that the value of the economic divisor depends markedly on population composition. When mortality differentials by gender and level of education are considered, economic divisors are mostly driven by the longevity effect corresponding to gender.
Highlights
Notional defined contribution (NDCs) schemes have been successfully implemented since the mid-1990s in several European countries such as Italy, Latvia, Norway, Poland and Sweden (Gronchi and Nistico, 2006; Chłoń-Domińczak et al, 2012)
NDC pension schemes attempt to reproduce the logic of a defined contribution pension plan – where the pension depends on contributions and investment returns – but within a pay-as-you-go (PAYG) framework (Vidal-Meliá et al, 2010) where contributions from current workers are used to pay for pension benefits of current pensioners
The use of gender-neutral annuity divisor in the conversion of the accumulated notional capital into a lifetime annuity under the NDC pension scheme introduces an intra-generational income redistribution when heterogeneity in mortality exists in the population
Summary
Notional defined contribution (NDCs) schemes have been successfully implemented since the mid-1990s in several European countries such as Italy, Latvia, Norway, Poland and Sweden (Gronchi and Nistico, 2006; Chłoń-Domińczak et al, 2012). The use of unisex life expectancy introduces an explicit intra-generational redistribution – income is transferred across groups within the same generation – from short-lived towards long-lived individuals, entailing a transfer of wealth from males who on average live shorter lives to females who live longer (Palmer, 2006; Alho et al, 2013; James, 2013).. The full life cycle is incorporated in the analysis, rather than annual effects, by using a particular indicator, namely the present value ratio that enables us to assess the expected money’s worth of participation in the pension system Another relevant aspect is the analysis of the impact of the inclusion or non-inclusion of the survivor dividend on fairness between individuals belonging to different subgroups. The paper ends with the conclusion and contains two appendices in which we present mathematical formulae for the notional account balance and the annuity divisors and technical details on the ‘stratified Lee-Carter’ for mortality rates
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