Nonfinancial Defined Contribution Schemes in a Changing Pension World Eds.: Robert Holzmann, Edward Palmer & David Robalino Edward Palmer Swedish Social Insurance Agency and Uppsala University

Outline of the Talk n What is NDC n NDC Countries n The First Wave of NDC Reforms - Paths to Reform - NDC at Work - Maintaining Financial Balance

What is NDC? n Fixed contribution rate for all generations. n Individual contributions noted on personal accounts. n Rate of return based on (nominal) covered per capita wage & covered labor force growth. n Life “annuity” based on individual’s account balance and cohort (unisex) life expectancy at retirement + rate of return. n Minimum pension age – but can work & contribute after this age – part or full time.

n Individual accounts give transparency – They state clearly the individual’s claim on future consumption. n Intra-generational fairness - Present value of a unit of contributions gives the same pension increment for all – i.e., no tax wedge. n Intergenerational fairness. - All generations pay the same rate on earned income (and % of GDP) into pensions. n Transparent s ocial policy through non-contributory rights - e.g., for early years of childcare, periods with sickness, disability, unemployment (financed with general revenues). n Accounts can be shared between spouses/legal partners. - During the accumulation period and/or joint annuities can be created at retirement. n Accounts can be combined with other insurance accounts Distinguishing micro features of NDC

n Financial sustainability - achieved through the internal rate of return and - integration of longevity changes into the pension formula n Labor supply incentives - Direct link between contributions and benefits - no tax wedge → neutral for labor supply decisions - encourages labor force formality - annuity construction provides an incentive to postpone retirement with improving longevity Distinguishing macro features of NDC

NDC Countries n The First Wave Countries - Italy Latvia Poland Sweden 1999 (published model 1992, legislation from 1994) n Other NDC countries - Kyrgyzstan 1996 (for new entrants) - Russia Egypt 2013 (anthology chapter) n Other studies in the anthology with NDC focus: - Chile, China (2 chapters), Greece, Uruguay - Norway (implemented 2012 but didn’t go all the way)

The First Wave of NDC Reforms Latvia, Italy, Poland & Sweden

Paths to Reform in Four Countries n Different histories n Key issues: Separating disability (and survivor ?) benefits from the NDC old age pension scheme n Retirement age(s) - minimum age for an NDC benefit - minimum age for a general budget financed guarantee; age for conversion of disability to old age n Transition – which cohorts are covered by the new scheme (overall reform strategy) n Administrative issues - contribution collection; development of administration; IT support; local office services; etc. n Communication of the reform to the public

NDC at Work in Four Countries Latvia, Italy, Poland & Sweden n Coverage n Integration with other pillars n Transition n Setting up individual accounts - Notional rate of return - Inheritance gains - Social rights financed by general budget revenues n Annuities - Denominator - Indexation n Minimum pension guarantee (externally financed)

NDC in four countries - Individual outcomes Based on the OECD pension models ItalyLatviaPolandSweden 0.300,991,080,961, ,750,800,740, ,750,800,750, ,750,770,750, ,770,730,750, ,780,700,770,88

1 year2 years3 years Italy-1,4%-2,8%-4,2% Latvia-1,8%-3,6%-4,2% Poland-0,8%-1,7%-2,5% Sweden-0,3%-0,5%-0,8% Reduction of replacement rates of women For 1-3 years spent on out of the formal labor market with childcare. Source. The OECD Pension Models.

Maintaining Long-Term Financial Balance n Choice of indexation n Allocation of the systematic mortality risk in annuities n Creation of an NDC Bond n Balancing mechanism

Country Change Italy 15,314,515,614,4-0,9 Latvia 9,77,36,35,9-3,8 Poland 11,810,910,39,6-2,2 Sweden 9,6 10,2 0,6 EU27 11,3 12,9 1,5 Source: 2012 Ageing Report, European Commission.

Thank you!