TY  - JOUR
AU  - Auerbach,Alan J.
AU  - Lee,Ronald
TI  - Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12805
PY  - 2006
Y2  - December 2006
UR  - http://www.nber.org/papers/w12805
L1  - http://www.nber.org/papers/w12805.pdf
N1  - Author contact info:
Alan J. Auerbach
Department of Economics
530 Evans Hall, #3880
University of California, Berkeley
Berkeley, CA 94720-3880
Tel: 510/643-0711
Fax: 510/643-0413
E-Mail: auerbach@econ.berkeley.edu

Ronald Lee
Departments of Demography and Economics
University of California, Berkeley
2232 Piedmont Avenue
Berkeley, CA  94720
Tel: 510/642-4535
Fax: 510/643-8558
E-Mail: rlee@demog.berkeley.edu
M1  - published as Alan J. Auerbach, Ronald Lee. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," in Jeffrey Brown, Jeffrey Liebman and David A. Wise, editors, "Social Security Policy in a Changing Environment" University of Chicago Press (2009)

M3  - presented at "Retirement Research", October 19-22, 2006
AB  - Around the world, Pay-As-You-Go (PAYGO) public pension programs face serious long-term fiscal problems due primarily to actual and projected population aging, and most appear unsustainable as currently structured.  Some have proposed the replacement of such plans with systems of fully funded private or personal Defined Contribution (DC) accounts, but the difficulties of transition to funded systems have limited their implementation.  Recently, a new variety of public pension program known as "Notional Defined Contribution" or "Non-financial Defined Contribution" (NDC) has been created, with the objectives of addressing the fiscal instability of traditional plans and mimicking the characteristics of funded DC plans while retaining PAYGO finance. Using different versions of the system recently adopted in Sweden, calibrated to US demographic and economic parameters, we evaluate the success of the NDC approach in achieving fiscal stability in a stochastic context.  (In a companion paper, we will consider other aspects of the performance of NDC plans in comparison to traditional PAYGO pensions.)  We find that the basic NDC scheme is effective at preventing excessive debt accumulation, but does little to prevent significant asset accumulation along many trajectories and on average.  With adjustment, however, the NDC approach can be made more stable.
ER  -