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Non-DC notional accounts: relaxing the trade-off between fairness and solvency of pay-as-you-go pension systems

Published online by Cambridge University Press:  08 October 2020

Sergio Nisticò Open the ORCID record for Sergio Nisticò [Opens in a new window]
Sergio Nisticò*
Affiliation:
Department of Economics and Law, University of Cassino and Southern Lazio, Cassino, FR, Italy
*
Corresponding author. Email: [email protected]
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Abstract

Existing pay-as-you-go (PAYG) schemes based on notional accounts (NAs) have chosen the defined-contribution (DC) setting that forces the rate of interest credited to all individual accounts to change over time to ensure solvency. On the other hand, volatility of the rate of interest is the source of non-negligible disparities of individual internal rates of return (IRRs) both within and across generations. It is argued that these disparities represent a threat to the political appeal of PAYG DC systems, in particular in the present situation characterized by low growth rates of the contribution base. The paper uses a four-overlapping-generations model to prove that the DC setting is not a necessary ingredient of NAs and that their political appeal could be enhanced by extending their use to non-DC pension systems. In fact, redistributions can be avoided by crediting all individual accounts with a constant rate of interest while ensuring financial solvency by fine-tuning of the contribution rate to make the system's revenues grow at the same (constant) rate credited to all accounts. The proof requires constancy of the employment growth rate but not of average earnings. Changes in the employment growth rate produce small oscillations around perfect balance between contribution revenue and pension expenditure manageable with a small buffer fund.

Keywords

Intergenerational fairnessNDC pension systemsnotional accountssolvency

JEL classification

H55: Social Security and Public Pensions J26: Retirement • Retirement Policies
Type
Article
Information
Journal of Pension Economics & Finance , Volume 21 , Issue 2 , April 2022 , pp. 168 - 190
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

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