The effects of aging on notional defined contribution pension systems: A theoretical investigation

This paper proposes a theoretical framework for analyzing the properties of pay-as-you-go notional defined contributions (NDCs) systems within the context of aging. Different from the defined-benefit scheme, where aging harms the financial sustainability of the social security system, the NDC determines pension benefits while taking into account life expectancy and demographic trends, turning the issue of financial sustainability into one of pension adequacy. This paper explores the balance sheet effects when life expectancy, retirement thresholds and entry age in the labor market vary by cohorts. The study suggests some solutions for practical issues concerning aging in NDC systems, such as (a) the bias related to the forecasts of survival rates, (b) the indexation of pension benefits and (c) the setup of tenure and age requirements for retirement.