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Conceptualizing, measuring and financing the legacy costs in an NDC reform*

Published online by Cambridge University Press:  09 July 2012

ROBERT HOLZMANN  and
ALAIN JOUSTEN
ROBERT HOLZMANN*
Affiliation:
University of Malaya (KL), IZA and CES
ALAIN JOUSTEN
Affiliation:
University of Liège, IZA and Netspar
*
Contact author: Robert Holzmann, [email protected]
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Abstract

The paper provides a framework for the conceptualization, definition and measurement of the legacy costs that needs to be addressed in a reform that transforms an unfunded (or non-financial) defined benefit (NDB) scheme into an equally unfunded notional (or non-financial) defined contribution (NDC) scheme. During a transition from NDB to NDC a financing gap typically arises due to accrued to date liabilities from the old system in excess of the NDC scheme's sustainable flow of benefits. This gap – or legacy cost – needs to be estimated and best explicitly financed. We illustrate different techniques to gauge the scope of the cost. The paper applies the proposed approach to a hypothetical NDC reform in China.

Keywords

H55H68J21J26legacy costspension reformNDCcoverage expansion
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 11 , Issue 4 , October 2012 , pp. 606 - 630
Copyright
Copyright © Cambridge University Press 2012

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Footnotes

*

Revised paper presented at the Joint Swedish Social Insurance Agency – World Bank Conference on Non-Financial Defined Contribution (NDC) Pension Systems: Progress and New Frontiers in a Changing Pension World, Stockholm, December 2–4, 2009. Very valuable comments and suggestions have been received from Sandy Mackenzie, Florence Legros, Edward Palmer, David Robalino, 3 anonymous journal referees, conference participants, and during presentations at the World Bank, Washington, DC, and the European Center/Institute for Advanced Studies, Vienna. For any remaining errors we take full responsibility. This paper reflects our own views and does in no case reflect the position and views of the organizations we are associated with.

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