OECD Social, Employment and Migration Working Papers

This series is designed to make available to a wider readership selected labour market, social policy and migration studies prepared for use within the OECD. Authorship is usually collective, but principal writers are named. The papers are generally available only in their original language - English or French - with a summary in the other.

English, French

Decomposing Notional Defined-Contribution Pensions

Experience of OECD Countries' Reforms

This paper compares notional defined-contribution pension schemes (also known as notional accounts) with two alternative designs of earnings-related pension schemes: points systems and definedbenefit plans. It examines, in detail, four economic advantages of notional accounts that deliver retirement incomes in an equitable and economically efficient manner. The issue of equity arises in the treatment of people who draw their pensions at different ages and contribute for a different number of years. The issue of economic efficiency arises because pension systems can and do distort individual decisions to work and save. First, benefits are based on lifetime earnings, rather than a subset of “best” or “final” years’ pay. Secondly, an extra year’s contribution gives rise to an additional benefit. Thirdly, benefits are reduced to reflect the longer expected duration of payment for people who retire early and, similarly, increased for people who retire late. Finally, benefits are reduced as life expectancy increases, again to reflect the longer duration for which benefits would be paid. An analysis of OECD countries’ pension systems – of all different types – shows that most have already achieved most of these objectives, but without adopting notional accounts.


JEL: J26: Labor and Demographic Economics / Demand and Supply of Labor / Retirement; Retirement Policies; H55: Public Economics / National Government Expenditures and Related Policies / Social Security and Public Pensions
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