Abstract
Notional defined contribution pension scheme experience in Latvia some lessons
Highlights
In 1996 Latvia became one of the first countries in the world to adopt the notional defined-contribution (NDC) pension system
The Notional Defined Contribution (NDC) concept for public pensions was born in the early 1990s and has been put into practice in a number of countries. “‘Go for an immediate transition, to avoid future problems’ – such is one among key policy lessons formulated by the experts of World Bank” (Holzmann and Palmer 2012: 3)
The authors have noted that another negative effect of an NDC scheme is that, in the absence of a generous guaranteed minimum pension, there will generally be greater income inequality among retirees
Summary
In 1996 Latvia became one of the first countries in the world to adopt the notional defined-contribution (NDC) pension system. Those who live from paycheque to paycheque can hardly afford to withdraw any additional amounts from their household budgets and cannot, expect any significant third-pillar supplement to their mandatory 1st and 2nd pillar old-age pension benefits This effect is exacerbated by low levels of financial literacy: as shown in recent international research (Lusardi and Mitchell 2011), persons with higher levels of education – who, as a rule, have higher incomes and make larger contributions to pension funds – are better informed in financial matters and are less vulnerable to the risks of choosing an inappropriate investment strategy.
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