Assessing The Notional Defined Contribution Model

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Most countries around the world base their old-age pension programs largely on the pay-as-you-go defined benefit (PAYGO DB) model. However, due to a number of factors including population aging, the maturing of these schemes, rapidly increasing old-age pension costs, and the perceived need to become more competitive in international markets, many nations have become increasingly concerned about the present (or projected future) economic burden of paying for the pension benefits promised by these schemes. This concern has led policy makers to look for alternative models. One of the most innovative alternatives to emerge during the past ten years is the notional defined contribution (NDC) model. In this article we describe this model and discuss some of the implications of a shift to this model for women and low-wage workers. We conclude that in the industrial nations women and low-wage workers are likely to do less well with schemes based all or in part on the NDC model because such schemes are typically designed to be less redistributive (from higher to lower income groups) than the PAYGO DB schemes they will be replacing. However, in developing countries the reverse will often be true as the NDC schemes are likely to be replacing PAYGO DB schemes that tend to redistribute from low-income groups to higher income groups. Relative to funded DC schemes a major advantage of the NDC model is that it does not subject individual pension benefits to the volatility of financial markets. This issue is relevant to workers in both developed and developing nations, but it is a particularly important consideration in developing nations.