Outline of the Talk

1. Nonfinancial Defined Contribution Schemes in a Changing Pension WorldEds.: Robert Holzmann, Edward Palmer & David RobalinoEdward Palmer Swedish Social Insurance Agency and Uppsala University

2. Outline of the Talk • What is NDC • NDC Countries • The First Wave of NDC Reforms- Paths to Reform- NDC at Work- Maintaining Financial Balance

3. What is NDC? • Fixed contribution rate for all generations. • Individual contributions noted on personal accounts. • Rate of return based on (nominal) covered per capita wage & covered labor force growth. • Life “annuity” based on individual’s account balance and cohort (unisex) life expectancy at retirement + rate of return. • Minimum pension age – but can work & contribute after this age – part or full time.

4. Distinguishing micro features of NDC • Individual accounts give transparency – They state clearly the individual’s claim on future consumption. • Intra-generational fairness - Present value of a unit of contributions gives the same pension increment for all – i.e., no tax wedge. • Intergenerational fairness.- All generations pay the same rate on earned income (and % of GDP) into pensions. • Transparent social policy through non-contributory rights - e.g., for early years of childcare, periods with sickness, disability, unemployment (financed with general revenues). • Accounts can be shared between spouses/legal partners. -During the accumulation period and/or joint annuities can be created at retirement. • Accounts can be combined with other insurance accounts

5. Distinguishing macro features of NDC • Financial sustainability - achieved through the internal rate of return and- integration of longevity changes into the pension formula • Labor supply incentives - Direct link between contributions and benefits- no tax wedge → neutral for labor supply decisions- encourages labor force formality- annuity construction provides an incentive to postpone retirement with improving longevity

6. NDC Countries • The First Wave Countries- Italy 1995- Latvia 1996- Poland 1999- Sweden 1999 (published model 1992, legislation from 1994) • Other NDC countries- Kyrgyzstan 1996 (for new entrants) - Russia 2002- Egypt 2013 (anthology chapter) • Other studies in the anthology with NDC focus:- Chile, China (2 chapters), Greece, Uruguay- Norway (implemented 2012 but didn’t go all the way)

7. The First Wave of NDC ReformsLatvia, Italy, Poland & Sweden

8. Paths to Reform in Four Countries • Different histories • Key issues: Separating disability (and survivor ?) benefits from the NDC old age pension scheme • Retirement age(s)- minimum age for an NDC benefit- minimum age for a general budget financed guarantee; age for conversion of disability to old age • Transition – which cohorts are covered by the new scheme (overall reform strategy) • Administrative issues- contribution collection; development of administration; IT support; local office services; etc. • Communication of the reform to the public

9. NDC at Work in Four CountriesLatvia, Italy, Poland & Sweden • Coverage • Integration with other pillars • Transition • Setting up individual accounts- Notional rate of return- Inheritance gains- Social rights financed by general budget revenues • Annuities- Denominator - Indexation • Minimum pension guarantee (externally financed)

10. NDC in four countries - Individual outcomes Based on the OECD pension models

11. Reduction of replacement rates of women For 1-3 years spent on out of the formal labor market with childcare. Source. The OECD Pension Models.

12. Maintaining Long-Term Financial Balance • Choice of indexation • Allocation of the systematic mortality risk in annuities • Creation of an NDC Bond • Balancing mechanism

13. Long-term macroeconomic picture- change in gross public pension expenditure with present rules Source: 2012 Ageing Report, European Commission.

14. Thank you!