Notional defined-contribution schemes: Old wine in new bottles?

Until recently, most pension benefit formulae in social security schemes resembled each other. They were all defined-benefit formulae that were either generous or mean, while defined-contribution formulae were exclusively used in private and occupational pension schemes and some national provident funds. Then came the mandatory retirement savings model, introduced in Chile and subsequently in other Latin American countries. It did not seem possible that such a formula could be used on any large scale in the pay-as-you-go environment of OECD pension schemes. In the early 1990s, however, Swedish social security experts devised the notional defined-contribution (NDC) system: individual social insurance pension contribution records are converted into a fictitious savings amount at retirement, whereupon the defined-contribution approach is followed. This article analyses how much of this approach is new. The conclusion is that it is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined-benefit formula. It is the packaging that differs and, in politics, that often is what matters.     

The ABCs of nonfinancial defined contribution (NDC) schemes

Nonfinancial defined contribution (NDC) pension schemes have been successfully implemented since the mid‐1990s in a number of European countries such as Italy, Latvia, Norway, Poland and Sweden. The NDC approach features the lifelong contribution–benefit link of a financial defined contribution (FDC) personal account scheme, but is based on the pay‐as‐you‐go (PAYG) format. At its start out, the PAYG commitments of the preceding defined benefit (DB) system are converted into individual personal accounts, allowing for a smooth transition from the DB to the DC format, while avoiding the very high transition costs inherent in a move from a traditional PAYG DB scheme to a fully funded FDC scheme. The NDC approach implemented by the rule book is able to manage the economic and demographic risks inherent to a pension scheme and, by design, creates financial sustainability. As in any pension scheme, the linchpin between financial stability and adequacy is the retirement age; in the NDC approach the individual retirement age above the minimum age is by design self‐selected and by incentives should increase the effective retirement age in line with population ageing. As a systemic reform approach NDC has become a strong competitor to piecemeal parametric reforms of traditional nonfinancial DB (NDB) schemes. While frequent, these reforms are far from transparent and usually too timid and too late to create financial sustainability while providing adequate pensions for the average contributor. This article offers a largely non‐technical introduction to NDC schemes, their basic elements and advantages over NDB schemes, the key technical frontiers of the approach, and the experiences of NDC countries.     

The Current Situation of Retirement Income Provisions in Japan: Social Security Pension Schemes and Corporate Pension Plans

Japan has been faced with rapid population ageing for decades. This has continuously reduced the level of social security pension benefits. Based on this it is often said that corporate pension plans should play a wider role forward in providing retirement benefits. However, we also have to know that there is a limit to what corporate pension plans can do in place of the social security pension schemes. In this paper we extract lessons from the history of social security pension schemes in our country and try to define the roles of corporate pension plans and social security pension schemes. In conclusion we should keep adequacy of social security pension benefits even if the contribution rate becomes a bit higher. Corporate pension plans just enrich people's life in retirement. We have to remember that corporate pension plans were not certain means for reducing the poverty in old age and that for this reason social security pension schemes by social insurance were invented.     

The Future of Retirement Protection in Southeast Asia

This paper analyses the formal retirement protection systems in five economically successful, rapidly industrializing, and globalized economies of Southeast Asia: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. It finds that while there are major differences in the formal retirement protection systems of the five countries in terms of coverage; contribution rates; scope and nature of preretirement schemes; investment patterns, practices and performance; replacement rates; administrative and compliance efficiency; and regulatory structures, the main common feature (with the exception of the Philippines) is aversion to social insurance and predominant reliance on individual provision through publicly mandated and managed provident funds. While these systems do minimize the fiscal burden on the State and thereby help maintain international competitiveness, they provide socially inadequate levels of retirement protection and are weak in ensuring efficiency of the saving-investment process. Moreover, several design and institutional features prevent full realization of many of the advantages of the provident funds found in these countries. They may, therefore, benefit by following the worldwide pension reform debate more closely, particularly concerning design and institutional and regulatory structures for mandatory defined-contribution schemes.     

A comparative analysis of pension reforms and challenges in Ghana and Nigeria

Ghana and Nigeria recently joined a number of countries that have incorporated fully‐funded defined contribution pension programmes into their national social security arrangements. Contemporary analyses of pension reforms, however, continue to focus on middle‐income countries in Latin America and Central and Eastern Europe, as well as on Member States of the Organisation for Economic Co‐operation and Development, thereby marginalizing recent pension policy reforms in sub‐Saharan African countries. This article examines the complete and partial shifts to defined contribution pension programmes in Nigeria and Ghana respectively, and points to a number of contextual and contingency factors that challenge the use of defined contribution schemes as a means to address problems of benefit adequacy in the sub‐Saharan African context.     

Social Security for the Informal Sector: A New Challenge for the Developing Countries

Informal sector workers constitute a large and increasing part of the labour force in most developing countries. Many of them are not able or willing to contribute a significant percentage of their incomes to finance formal sector social insurance benefits that do not meet their priority needs. Therefore, informal sector workers themselves need to (and have) set up health and other social insurance schemes that better meet their needs and contributory capacity. In addition, special social assistance schemes are necessary to protect the most vulnerable groups outside the labour force. This article also assesses some key implications of these developments for formal social insurance schemes.     

THE SOCIAL SECURITY CRISIS: AN INTERNATIONAL DILEMMA1

Social security systems throughout the world are in a dilemma. The over-expansion of the sixties has compounded the current recession's unemployment and other problems and created an “ideal” system difficult for the economically depressed countries to alter. Older workers are particularly hard hit during recessions. They are often pressured into retirement, with no financial or career alternatives, in an attempt to free up jobs for younger and hard-to-place workers. Many schemes have been devised to compensate older workers for their losses: high unemployment compensation, partial unemployment benefits and a liberal interpretation of disability insurance and other assistance programmes not specifically designed for the elderly. The author exposes many proposals for altering social security but concludes that most schemes have not yet been implemented. While international economic recovery would surely heal the ailing systems, the author contends there are remedial measures, largely ignored at present, that could be taken to soothe the systems' wounds.     

Promoting a higher retirement age: A prospect‐theoretical approach

Demographic ageing and the necessity of raising the retirement age is one of the most frequently debated topics among European welfare policy experts. This study used prospect theory as developed in behavioural economics to explain public attitudes towards pension reforms. It argues that, in line with prospect theory, negative incentives are more useful in changing people's attitudes in favour of a higher statutory retirement age than are positive incentives. Therefore, in the case of increasing life expectancy, defined‐contribution schemes that apply actuarial formulae linking the level of starting monthly pension benefits to life expectancy are more useful in promoting a higher retirement age than conventional defined‐benefit schemes, which typically do not forge an automatic connection between longevity and starting pensions. The implications of prospect theory for attitudes towards pension reforms were tested using Eurobarometer survey data collected in 2004 and 2009 in the Czech Republic, Poland and Slovakia.     

The decline of substitute pathways into retirement: Empirical evidence from the Dutch health care sector

Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of “substitute pathways” into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of “substitute pathways” has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.     

Social Security Pensions in the Maghreb: A Study of Morocco and Tunisia

Long-term pension schemes in Morocco and Tunisia, taking all elements together, are very much in decline and for the moment there is no serious option available to make up for the limited scope of the contributory model of social insurance. Furthermore, efforts to coordinate and harmonize these schemes are only just getting going. Eligibility conditions are very strict and the benefits paid — to people with disabilities, to retirees or their surviving dependants — are frugal. Privatization of pensions helps only those able to take out private insurance, benefiting a tiny proportion of the target population. Tunisia, however, has provided its people with better safeguards than Morocco, a more populous country whose rulers are less inclined to be generous in this respect. Whatever the case, those in charge of social insurance in both countries have a long way to go before their rapidly ageing populations can aspire to a relatively decent quality of life.     

Social Security in Australia and New Zealand: Means-tested or Just Mean?

The social security systems of Australia and New Zealand have traditionally rejected social insurance in favour of a means-tested categorical safety net approach that provides considerable scope for targeting. The experience of both countries provides many examples of how targeting can be used to constrain social security spending, and these have attracted interest in other countries keen to contain the growth in their social security budgets. However, although there are many similarities between the two systems, there are also many differences and these have become greater as targeting has gathered momentum over the last two decades. This paper analyses how targeting has been used in each country as a way of illustrating the different approaches adopted. Attention is focused on how the retirement income systems of the two countries illustrate an increasing policy divergence, with the planned Australian transition to a "multi-pillar" approach in contrast to the constant (and continuing) reform of New Zealand superannuation. Household data on the pattern of receipt of transfer incomes and their impact on the distribution of income are then used to explore the impact of targeting since the early 1980s. This analysis suggests that, in practice, targeting has had a far smaller impact on income inequality in both countries than is often claimed.     

Trends in Social Security in East Africa: Tanzania, Kenya and Uganda

As elsewhere in the world and in Africa in particular, social security in the member countries of the East African Community (Kenya, United Republic of Tanzania, and Uganda) has long been provided through voluntary assistance under the traditional extended family system. Later, and more specifically after independence in the early 1960s, when the region had a major increase in the number of employees in the formal sector — both public and private — who were mainly located in urban centres, formal social security schemes started to gain recognition among employed workers. Thus over the years, the urban population became increasingly detached from rural communities where the traditional extended family system was most effective. In addition, their general standards of living rose to such levels that if they ceased to earn employment income for one reason or another their livelihood could not be sustained through the extended family system. The above social security development trends have resulted even today in societies examining and determining ways to improve social protection beyond the formal sector so as to ensure arrangements are put in place for a large part of the working population to be provided with social security insurance during their working life and after retirement.     

The impact of tax-financed pensions on poverty reduction in Latin America: Evidence from Argentina, Brazil, Chile, Costa Rica and Uruguay

In many Latin American countries, tax-financed pensions (TFPs) have expanded, mainly resulting from growing informalization of employment and stagnating or declining pension insurance coverage. In the five countries examined in this article, TFPs have generally been effective in reducing poverty and indigence. In Brazil rural social assistance pensions cut the incidence of destitution among poor older people by 95 per cent. In Chile TFPs considerably improved their poverty reduction effectiveness between 1990 and 2000. Tax-financed pensions have therefore been seen as an instrument to supplement contributory pension coverage and boost overall social security coverage. A key challenge is to increase pension insurance coverage through existing statutory pension insurance or special contributory schemes targeted on workers in the informal economy. Otherwise, TFPs could become financially and socially unsustainable in the future. There are also various ways to improve the financing, administration and eligibility criteria of TFPs, particularly because it is necessary to define consistent structure and benefit policies between these and contributory schemes.     

On welfare effects of increasing retirement age

We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.     

The coverage of social protection in the Global South

About 73% of the global population is not, or is only partly, covered by social protection. Particularly across low‐ and middle‐income countries (LMICs), social protection coverage is highly heterogeneous. What explains the large differences in the inclusiveness of social protection across LMICs? By analysing 100 LMICs using retirement schemes as an example, this study shows that non‐contributory schemes in LMICs are, by far, more inclusive than contributory ones. Surprisingly, democratic institutions characterised by low levels of political corruption only promote the inclusiveness of non‐contributory social protection while reducing the coverage of contributory schemes.     

Pension scheme fees and charge ratios in 44 countries: A comparative study

Based on data received from pension supervisory authorities, the article reviews 85 different pension schemes in 44 jurisdictions by looking at fees and charges as well as their legal ceilings and their development since 2014. A key finding is the observed decrease in fees and caps. The article presents jurisdictions according to clusters, i.e. by groups of countries with identical or very similar items already covered by pension fees, and analyses the extent to which various cost and fee elements are covered by fees charged to members. Finally, we calculate charge ratios for each cluster to quantify the impact of fees and charges on pension savings. Occupational defined contribution pension schemes and personal plans linked to employment tend to be much more cost effective than personal schemes that have no direct employment link.     

Developing countries and systemic pension reforms: Reflections on some emerging problems

Since 1981 close to forty countries have introduced systemic pension reforms that have replaced all or part of prior pay‐as‐you‐go (PAYG) schemes with privately managed funded defined contribution (FDC) pillars or systems. However, over the past decade about half of these countries have subsequently cutback on, or entirely eliminated, these FDC schemes. In this article we explore some of the reasons why this reversal is often taking place in developing countries. As part of our analysis we propose a new pension reform typology that goes beyond the commonly used dichotomy between PAYG and pension privatization. We identify and discuss four factors that are of particular relevance to those seeking to understand the pension policy reversals that have been taking place in many developing countries: low pension coverage and incentive incompatibility, triple burden costs, tradeoffs between pension reforms and social pensions, and difficulties with annuitization.     

Poland: Social protection and the pension system during the transition

This paper argues that the brunt of the transition-induced increase in Polish social protection expenditures during 1989-93 has been borne by social insurance arrangements, particularly pensions, rather than by social assistance schemes targeted to the poor or more temporary social safety net schemes. This is largely due to ease of access to social insurance and its more attractive benefit structure. Much of the recent efforts to reform social protection arrangements had an ad hoc nature and was driven by the need to alleviate looming financial distress. A major policy challenge is to avoid further burdening the social insurance system, particularly pensions, by problems that should be addressed by basic income support and emergency assistance policies or by general transfers (e.g. family allowances). Current reform needs are illustrated by using the pension system as an example.     

Health care as a social security benefit: Institutional approaches to extending coverage

Reaching universal health‐care coverage requires an appropriate mix of compulsory contributory social insurance schemes, with mechanisms to include the informal‐economy population, and tax‐based social assistance for those whose incomes preclude their own contributions. This article urges a reversal of the trend that favours the separate development of social health insurance by separate health authorities and makes the case for the extension of health‐care coverage using existing formal‐sector social security schemes, not least because they have the necessary political backing and institutional structures. The article reviews reasons for the slow pace of coverage extension to date, and stresses the added value of incorporating health care as a social security benefit while also acknowledging the importance of retaining linkages between statutory and well‐regulated community‐based or micro health‐insurance schemes.     

Income security for older people: An Asian perspective

In Asia and the Pacific, as in other developing regions, the continuing growth of the aged population has a great impact on social security programmes generally and, in particular, on the income security of older persons. In societies where traditional support systems are breaking up, their need for social security protection is increasingly important. A system of social security for the elderly population exists in most countries of the region. Many are provident fund schemes, which are basically saving schemes, and their coverage is low. Where social insurance pension schemes exist, the levels of benefits provided are also low. The focus for future development, therefore, lies in converting the savings schemes into multitiered pension schemes, extending their coverage and raising the level of benefits. In this context the critical question concerns the role of the State and the type of schemes used. The need for public pension schemes is great in Asia and the Pacific, where the level of poverty is comparatively high. Building pension schemes, whether public or private, involves a set of issues that need to be addressed. This article considers the systems currently in place and the challenges and limitations faced when considering the future development of social security in this area.