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NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign

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  • Holzmann, Robert

    (University of New South Wales)

  • Alonso-García, Jennifer

    (ARC Centre of Excellence in Population Ageing Research (CEPAR))

  • Labit-Hardy, Heloise

    (ARC Centre of Excellence in Population Ageing Research (CEPAR))

  • Villegas, Andres M.

    (UNSW Sydney)

Abstract

Strong and rising empirical evidence across countries finds that longevity is highly heterogeneous in key socioeconomic characteristics, including income. A positive relationship between lifetime income and life expectancy at retirement amounts to a straight tax/subsidy mechanism when the average cohort life expectancy is applied for annuity calculation, as done under nonfinancial defined contribution (NDC) schemes. Such a regressive redistribution and the ensuing labor market distortion put into doubt main features of the NDC scheme and call for alternative benefit designs to compensate for the heterogeneity. This paper explores five key mechanisms of compensation: individualized annuities; individualized contribution rates/account allocations; a two-tier contribution structure with socialized and individual rate structure; and two supplementary approaches under the two-tier approach to deal with the income distribution tails, and the distortions above a ceiling and below a floor. Using unique data from England and Wales and the United States, the analysis indicates that both individualized annuities and a two-tier contribution scheme are feasible and effective and thus promising policy options. To this end, however, a de-pooling of gender will be required.

Suggested Citation

  • Holzmann, Robert & Alonso-García, Jennifer & Labit-Hardy, Heloise & Villegas, Andres M., 2017. "NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign," IZA Discussion Papers 11193, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp11193
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    Cited by:

    1. De Santis Gustavo, 2024. "Demography, Economy and Policy Choices: The Three Corners of the Pension Conundrum," Statistics, Politics and Policy, De Gruyter, vol. 15(2), pages 169-200.
    2. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2021. "Addressing the life expectancy gap in pension policy," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 200-221.
    3. Culotta, Fabrizio & Alaimo, Leonardo Salvatore & Bravo, Jorge Miguel & di Bella, Enrico & Gandullia, Luca, 2022. "Total-employed longevity gap, pension fairness and public finance: Evidence from one of the oldest regions in EU," Socio-Economic Planning Sciences, Elsevier, vol. 82(PA).
    4. Ayuso, Mercedes & Bravo, Jorge M. & Holzmann, Robert, 2021. "Getting life expectancy estimates right for pension policy: period versus cohort approach," Journal of Pension Economics and Finance, Cambridge University Press, vol. 20(2), pages 212-231, April.
    5. Bernd Genser & Robert Holzmann, 2019. "National Pension Policy and Globalization: A New Approach to Strive for Efficient Portability and Equitable Taxation," Working Paper Series of the Department of Economics, University of Konstanz 2019-04, Department of Economics, University of Konstanz.
    6. Eytan Sheshinski & Frank N. Caliendo, 2021. "Social Security and the increasing longevity gap," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(1), pages 29-52, February.
    7. Jesús-Adrián Álvarez & Malene Kallestrup-Lamb & Søren Kjærgaard, 2020. "Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans," CREATES Research Papers 2020-17, Department of Economics and Business Economics, Aarhus University.
    8. Simonovits, András & Lackó, Mária, 2021. "A várható élettartam-jövedelem kapcsolat egyszerű ökonometriai becslése - újraelosztás a nyugdíjrendszerben [A simple estimate of the longevity gap and redistribution in the pension system]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 1162-1170.
    9. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2023. "Intergenerational actuarial fairness when longevity increases: Amending the retirement age," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 161-184.
    10. Fabrizio Culotta, 2021. "Life Expectancy Heterogeneity and Pension Fairness: An Italian North-South Divide," Risks, MDPI, vol. 9(3), pages 1-22, March.
    11. Alvarez, Jesús-Adrián & Kallestrup-Lamb, Malene & Kjærgaard, Søren, 2021. "Linking retirement age to life expectancy does not lessen the demographic implications of unequal lifespans," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 363-375.
    12. Keivan Diakite & Pierre Devolder, 2021. "Progressive Pension Formula and Life Expectancy Heterogeneity," Risks, MDPI, vol. 9(7), pages 1-19, July.
    13. Sanchez-Romero, Miguel & Lee, Ronald D. & Prskawetz, Alexia, 2020. "Redistributive effects of different pension systems when longevity varies by socioeconomic status," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    14. Milevsky, Moshe A., 2020. "Swimming with wealthy sharks: longevity, volatility and the value of risk pooling," Journal of Pension Economics and Finance, Cambridge University Press, vol. 19(2), pages 217-246, April.
    15. Mercedes Ayuso & Jorge M. Bravo & Robert Holzmann & Edward Palmer, 2021. "Automatic Indexation of the Pension Age to Life Expectancy: When Policy Design Matters," Risks, MDPI, vol. 9(5), pages 1-28, May.
    16. Holzmann, Robert & Ayuso, Mercedes & Alaminos, Estefanía & Bravo, Jorge Miguel, 2019. "Life Cycle Saving and Dissaving Revisited across Three-Tiered Income Groups: Starting Hypotheses, Refinement through Literature Review, and Ideas for Empirical Testing," IZA Discussion Papers 12655, Institute of Labor Economics (IZA).
    17. Wang, Suxin & Lu, Yi, 2019. "Optimal investment strategies and risk-sharing arrangements for a hybrid pension plan," Insurance: Mathematics and Economics, Elsevier, vol. 89(C), pages 46-62.
    18. Hieber, Peter & Lucas, Nathalie, 2020. "Life-Care Tontines," LIDAM Discussion Papers ISBA 2020026, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    19. Mikkel Barslund, 2020. "Pension Systems in the EU — Some Policy Issues," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(2), pages 69-72, March.
    20. Daniele Franco & Pietro Tommasino, 2020. "Lessons From Italy: A Good Pension System Needs an Effective Broader Social Policy Framework," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(2), pages 73-81, March.
    21. Alonso-García, Jennifer & Devolder, Pierre, 2019. "Continuous time model for notional defined contribution pension schemes: Liquidity and solvency," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 57-76.
    22. Anca-Stefania Jijiie & Jennifer Alonso Garcia & Séverine Arnold (-Gaille), 2019. "Mortality by socio-economic class and its impact on the retirement schemes: How to render the systems fairer?," ULB Institutional Repository 2013/300032, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    tax/subsidy structure; proxied life expectancy; two-tier contribution structure; gender de-pooling;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination

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