NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign

ARC Centre of Excellence in Population Ageing Research, Working Paper No. 2017/18

27 Pages Posted: 18 Dec 2017

See all articles by Robert Holzmann

Robert Holzmann

University of Malaya; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); World Bank

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; ARC Centre of Excellence in Population Ageing Research; Netspar

Héloïse Labit Hardy

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies

Andrés Villegas

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2017

Abstract

Strong and rising empirical evidence across countries finds that longevity is highly heterogeneous in key socioeconomic characteristics, including income. A positive relationship between lifetime income and life expectancy at retirement amounts to a straight tax/subsidy mechanism when the average cohort life expectancy is applied for annuity calculation, as done under nonfinancial defined contribution (NDC) schemes. Such a regressive redistribution and the ensuing labor market distortion put into doubt main features of the NDC scheme and call for alternative benefit designs to compensate for the heterogeneity. This paper explores five key mechanisms of compensation: individualized annuities; individualized contribution rates/account allocations; a two-tier contribution structure with socialized and individual rate structure; and two supplementary approaches under the two-tier approach to deal with the income distribution tails, and the distortions above a ceiling and below a floor. Using unique data from England and Wales and the United States, the analysis indicates that both individualized annuities and a two-tier contribution scheme are feasible and effective and thus promising policy options. To this end, however, a de-pooling of gender will be required.

Keywords: Tax/Subsidy Structure, Proxied Life Expectancy, Two-Tier Contribution Structure, Gender De-pooling

JEL Classification: D9, G22, H55, J13, J14, J16

Suggested Citation

Holzmann, Robert and Alonso-García, Jennifer and Labit Hardy, Héloïse and Villegas, Andrés, NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign (December 13, 2017). ARC Centre of Excellence in Population Ageing Research, Working Paper No. 2017/18, Available at SSRN: https://ssrn.com/abstract=3087570 or http://dx.doi.org/10.2139/ssrn.3087570

Robert Holzmann

University of Malaya ( email )

University of Malaya
Kuala Lumpur, Wilayah Persekutuan 50603
Malaysia

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Jennifer Alonso-García (Contact Author)

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

ARC Centre of Excellence in Population Ageing Research ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Héloïse Labit Hardy

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Australia Business School
Sydney, NSW 2052
Australia

Andrés Villegas

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

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