Notional Defined Contribution Pensions with Public Reserve Funds in Ageing Economies: An Application to Japan

23 Pages Posted: 2 Oct 2008

See all articles by Bei Lu

Bei Lu

UNSW Business School

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics

Abstract

Several developed and developing countries have recently adopted a notional defined contribution (NDC) approach to old-age pension reform. The NDC is essentially a non-pre-funded defined contribution retirement system, in which contributions are credited with a rate of return related to aggregate payroll growth, and individual account accruals are maintained in a book-keeping system. Payouts are annuitized based on the expected mortality of each succeeding retiring cohort. NDC plans may be identified with appropriately calibrated Pay-As-You-Go plans in demographic equilibrium, but the two paradigms diverge when demographic shift is introduced. This paper investigates the key actuarial and economic implications of alternative NDC rules, with a particular focus on Japan, the world's most rapidly ageing economy. We examine the potential role for pension reserves in transitioning to an NDC system, and we show these can be used to smooth the impact of demographic transition to an older society. Finally, we show that countries such as Japan could elect to use pension reserves accumulated in the past to facilitate the transition to an NDC system.

Suggested Citation

Lu, Bei and Mitchell, Olivia S. and Piggott, John, Notional Defined Contribution Pensions with Public Reserve Funds in Ageing Economies: An Application to Japan. International Social Security Review, Vol. 61, Issue 4, pp. 1-23, October/December 2008. Available at SSRN: https://ssrn.com/abstract=1273935 or http://dx.doi.org/10.1111/j.1468-246X.2008.00321.x

Bei Lu (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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