Optimal notional defined contributions

Carlos Eugênio da Costa () and Marcelo Rodrigues dos Santos

No 822, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Notional Defined Contributions (NDC) systems mimic the incentive structure of fully funded social security while preserving the Pay-as-you-go nature of most current systems. We study size-preserving social reforms which replace the current US system with alternative NDCs with many alternative contribution rules and deficit/GDP ratios. If one retains the current mandatory age-independent contribution rules we find change to an NDC to reduce welfare: the sacrifices in distributive and insurance properties are not compensated by the efficiency gains. NDCs are, however, flexible enough to allow for alternative contribution rules which increase welfare while preserving actuarial fairness. Contributions ought to be age-dependent and concentrated later on a worker’s career. The incentive structure induces an increase in capital accumulation that results, through general equilibrium effects, in welfare gains which are larger for low productivity workers, despite the increase in income inequality as captured by the Gini coefficient.

Date: 2021-03-17
New Economics Papers: this item is included in nep-age and nep-dge
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