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doi
10.1787/5km68fw0t60w-en

Decomposing Notional Defined-Contribution Pensions

Decomposing Notional Defined-Contribution Pensions

Flag for IGO OECD on October 22nd 2010
Edward Whitehouse
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 expe...

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Citations

Cited by 73 other policy documents (13 of them are from other policy sources)