Notional Defined Contributions (NDC): Solvency and Risk in Spain

23 Pages Posted: 18 Sep 2007

See all articles by María el Carmen Boado-Penas

María el Carmen Boado-Penas

University of Liverpool

Inmaculada Domínguez-Fabián

University of Extremadura - Department of Economics

Carlos Vidal-Meliá

University of Valencia - Department of Financial Economics

Abstract

The aim of this article is twofold: to demonstrate the actuarial imbalance in the Spanish pension system in its current form; and to measure the degree of aggregate economic risk to which pensioners are exposed when applying formulas for the calculation of retirement pensions based on notional accounts. The model used generates scenarios for various periods encompassing some 10,000 different permutations of the macroeconomic indices needed to calculate such parameters as initial pension, earnings replacement rate, or internal rate of return and value at risk. The findings are analysed both objectively and subjectively. The main conclusions are that if the projections for the macroeconomic indices used bear only a minimal resemblance to reality, the pension system will accumulate further financial imbalance in the future that will force it either to reduce initial pensions considerably or to make some radical adjustments to the parameters. In terms of risk, for beneficiaries with high risk aversion the preferred formulas would be those based on future variations in wages with a constant pension amount in real terms; on the other hand, those less averse to risk would prefer formulas that generate a smaller initial pension but one which grows in real terms with subsequent changes in wage levels.

Suggested Citation

Boado-Penas, María del Carmen and Domínguez-Fabián, Inmaculada and Vidal-Meliá, Carlos, Notional Defined Contributions (NDC): Solvency and Risk in Spain. International Social Security Review, Vol. 60, No. 4, pp. 105-127, October-December 2007, Available at SSRN: https://ssrn.com/abstract=1014720 or http://dx.doi.org/10.1111/j.1468-246X.2007.00282.x

María del Carmen Boado-Penas (Contact Author)

University of Liverpool ( email )

Liverpool
United Kingdom

Inmaculada Domínguez-Fabián

University of Extremadura - Department of Economics ( email )

Avda. de Elvas s/n
06071 Badajoz
Spain

Carlos Vidal-Meliá

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
28
Abstract Views
711
PlumX Metrics