Mortality by socio-economic class and its impact on the retirement schemes: how to render the systems fairer?

Many OECD countries have addressed the issue of increased longevity by mainly increasing the retirement age. However, this kind of reforms may lead to substantial transfers from those with shorter lifespans to those that will live longer than the average, as they do not necessarily take into account the socio-economic differences in mortality. The contribution of our paper is therefore twofold. Firstly, we illustrate how both a Defined Benefit and a Notional Defined Contribution pay-as-you-go scheme can put the lower social economic classes at a disadvantage, when compared to the actuarially fair pensions. In contrast to that, higher classes experience a gain. This is due to the fact that mortality rates per socio-economic class are not considered by either scheme. Consequently, we propose a model that determines the parameters for each scheme and class which would render the pensions fairer even when no socio-economic mortality differences are considered.

The transition to NDC in Italy: assessing distributive and financial effects

Moving from a Defined Benefit (DB) to a Notional Defined Contribution (NDC) pension formula creates significant re-distributive effects. We estimate the amount and the intensity of these effects in the case of the Italian transition to NDC, which began in 1995. Based on administrative data of the main Italian pension scheme (FPLD), we study the evolution of yearly inequality within old-age pension benefits. Furthermore, we study the adequacy and the actuarial fairness of the pension system, by estimating the replacement rates and the Net Present Value Ratio distribution for workers who retired in the period 1996–2019. Our results show that the very generous interpretation of acquired rights determined by the 1995 reform has contributed to maintaining a high level of adequacy and a significant level of intergenerational imbalance. The financial costs of this imbalance are estimated and its extent is significant.

Notional Defined Contribution (NDC) Schemes: a pension system alternative

This article aims to discuss the main concepts related to notional defined contribution (NDC) schemes and to analyze the experiences of Sweden, Italy, Latvia, Poland and Norway. The methodology is based on a literature review. The main result was that the extent of NDC as a pension system alternative depends on the degree of closeness to the generic scheme. It is recommended to analyze NDC as an alternative for pension system reforms considering its capacity to control structural deficits. As a limitation, it was not analyzed some possible social impacts of NDC introduction. This article is original because encompasses theoretical and practical aspects of NDC schemes. It is expected that this research can contribute to assist public officials in decision-making about reforms in pension systems.

Fairness and annuity divisors for notional defined contribution pension schemes

The 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.

Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical application we apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.

Retirement Ages by Socio-Economic Class

We are interested in defining the optimal retirement age by socio-economic class, given a Defined Benefit and a Notional Defined Contribution scheme. We firstly implement a utilitarian framework. Depending on the risk aversion coefficients and individual time preference factors, the results differ significantly. Since this approach is individualistic, with no consensus in the existing literature on what values these parameters should take, it is not suitable to be used by policy makers. Therefore, we provide an alternative based on two accounts. We look for the retirement age allowing the accumulated value, at the last age with survivors, of the pensions received under each system, held in one account, to be close in value to the accumulated amount should the actuarially fair pension be paid, representing the second account. Our approach results in setting a lower retirement age for lower socio-economic classes and a higher retirement age for wealthier individuals.

A Comparison of Lithuanian and Swedish Old Age Pension Systems

[full article and abstract in English] The aim of this study is to compare Lithuanian and Swedish pension systems from the point of view of their design and performance in order to elaborate reasonable recommendations to Lithuanian pension policy based on the best Swedish experience. Swedish income, premium and guaranteed old-age pensions system are compared with the analogous Lithuanian system of the “first,” “second” pillars and the “social” pensions. The main features of the systems are discussed, and the performance of the systems, mainly from the point of view of adequacy, is compared. The differences in system design and performance are identified, and the possible reasons of these differences are examined. Special attention is paid to differences in financing and the approach to the definition of benefits. The Lithuanian pension points approach is compared to the Swedish Notional Defined Contribution (NDC) approach. Each system is analyzed, and the relevance of transforming the Lithuanian first pillar pensions into a NDC system is examined.

The Notional Defined Contribution Pension Scheme and the German ‘Point System’: A Comparison

This paper examines the analytical properties of the German ‘points-based’ pension system. These properties are compared with those of a canonical Notional Defined Contribution (NDC) pension scheme. The paper identifies the circumstances under which the German ‘points-based’ system would mimic a Swedish-type NDC scheme and verifies to what extent the German ‘points-based’ scheme ensures uniformity of individual rates of return for some hypothetical careers. Finally, the paper proposes a set of new possible adjustment rules able to increase similarity between the German point system and the NDC scheme.