Abstract
Public pension systems based on the Notional Defined Contribution (NDC) principle were introduced during the ‘90s in Italy, Sweden and Poland, among other countries. They mimic private savings, in that individuals get back, as pensioners, what they contributed to social security during working life, plus returns. As such, NDC systems should realize actuarial equity and incentive neutrality. However, when one considers the presence of NDC pensions together with minimum and social assistance pensions, this is no longer true. Indeed, in all the three countries considered, the NDC system shows a regressive feature, which disincentives contributions, particularly from low earners, who would be better off entering, or staying in, the shadow economy. In order to reduce the extent of this phenomenon, we examine the effects of introducing, or increasing, the possibility of accumulation of social assistance and NDC pensions, which would also improve pension adequacy. A complete accumulation of the two would solve the incentive problem, but would be costly and would require a structural reform of the pension system financing mechanism, altering the current balance between social contributions and general fiscal revenues. We show the effects of a change in the accumulation rules for social assistance and NDC pensions in Italy using CAPP DYN, a population-based dynamic micro simulation model, which allows assessment of the evolution of the pension system in the coming decades and the distributional implications of such reform.
Highlights
We are not aware of any contribution dealing with the issue we examine in this paper: the failure of Notional Defined Contribution (NDC) systems to guarantee actuarial equity and incentive neutrality when the interaction of NDC and social assistance pensions3 is considered
For the purpose of the present study we present some indicators of the adequacy of the reformed pension system first, and we move to analyze the part of the population of pensioners directly interested by the coexistence of NDC pensions and social allowance benefits
NDC pension systems are built on principles of actuarial fairness and incentive neutrality
Summary
Issues like the effectiveness of the incentive structure to contribute in a NDC system and its actuarial fairness have been receiving little attention: they are considered as embedded in the Defined-Contribution (DC) formula, and, at best, analysis has been made just comparing NDCs with Defined-Benefit (DB) private pension funds. In such a framework, we are not aware of any contribution dealing with the issue we examine in this paper: the failure of NDC systems to guarantee actuarial equity and incentive neutrality when the interaction of NDC and social assistance pensions is considered. An incentive failure similar to the one that characterizes poverty and unemployment traps arises, with a distinctive feature, in this case, that no activation policies can be implemented
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