A new publication on pension reform examines nonfinancial defined contribution (NDC) pension schemes as an approach to help policymakers meet the challenges brought on by rapidly aging populations and the changing nature of work, says the World Bank. In a world in which working lives will be increasingly longer, and demands for social care services will expand, pension systems will need to be reformed to ensure workers are protected and do not fall into poverty in old age.
Titled “Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes”, this publication brings together evidence on NDCs pension schemes and reforms more broadly to bear on today’s labor market. NDC is a type of public pension system in which workers pay contributions to finance the benefits of current retirees, similar to traditional public pension schemes. However, unlike the latter, the NDC approach factors in automatic adjustments based on demographic changes, a key advantage given the increased aging and decreased fertility in many societies today. Over the past decades, NDCs have emerged as a key tenet in global thinking about pensions, as this framework ensures more efficient and effective social risk sharing, and better public resource allocation.
“The unique feature in the NDC framework is a built-in design that achieves affordability, financial sustainability, and intergenerational fairness,” said Robert Holzmann, Governor for the Austrian National Bank and one of two lead editors of the volume. “With individual accounts come transparent information on the interaction of individuals’ decisions to work and pay contributions and their own roles in determining their future pension outcomes,” he said.
An NDC framework also allows countries to address poverty in the aging population, if it is accompanied by a well-thought out complement to provide a safety net for the elderly. “Special efforts must be devoted to constructing a zero pillar to address poverty in old age,” said Edward Palmer, Professor of Social Insurance Economics at Uppsala University, Sweden, and the other lead editor of the volume. “This ensures that people with low lifetime incomes, such as those who work predominantly in “unremunerated home care” and otherwise in the informal market economy – typically in emerging but also in developed economies – are provided with adequate basic protection in old age,” From this standpoint, governments have a key role to play in providing a basic level of pension to prevent poverty in old age.
“The lessons from theory and practice contained in this book will help us all find better responses to the biggest challenges of the current time: adapting the social protection systems to the challenges of aging populations and the changing labor markets and contributing to human capital for the current and future generations,” said Michal Rutkowski, Global Director of the World Bank Social Protection and Jobs Global Practice. “The World Bank’s vision is one in which social insurance is extended to all workers, independently of how they engage in the labor market,” said Rutkowski.
The recent World Bank white paper on “Protecting All: Risk-Sharing in a Diverse and Diversifying World” proposes an approach to worker protection and social security that is better adapted to an increasingly diverse and fluid world of work, and the NDC approach to pensions represents a framework that is individually financed and considered “actuarially fair”.
Based on a 2017 Rome conference by INNAP, funded by the Swedish Pension Agency, and published by the World Bank Group, this new anthology documents twenty years of country experiences where NDC pension schemes were introduced, and addresses specific dimensions of pension policies under this scheme, such as poverty, labor market, family and gender, and longevity. It includes 31 contributions from academics, practitioners, policy makers, and experts in pensions and social policy.