Thursday, February 07, 2013

Notional defined contribution (NDC) schemes (like in Sweden) could make Social Security sustainable -- but not progressive


The Economist (Feb. 2, 2013) has an interesting proposal for the whole concept of pension and social security reform, to take into account longer lifespans and demographics automatically.

The article (in “Free Exchange”) maintains that Social Security is a “defined benefit” bur “Pay as you go” (PAYG) scheme, logically an oxymoron.
  
The idea of a “notional defined-contribution” plan (NDC) is implemented in Sweden and is effectively a quasi-annuity with payouts adjusted (usually reduced) automatically as demographic statistics demand.  If US Social Security were converted to such a system, beneficiaries would have a legal enforceable “property right” to their benefits (because of the definition of “defined contribution”), but only as scaled back automatically for demographics. 

Implementing such a plan would certainly make Social Security sustainable (although there could be short term accounting problems with effectively “double contributions” to make up for those who didn’t pay in enough).  It would also remove any idea that it is “welfare” or should be progressive and would lead to gradually reduced benefits, even for current beneficiaries.  Therefore it would be likely to meet political resistance, especially from liberals. 
  
The Economist article is here
     
The article also uses the term “national savings accounts”.

The "notional defined contribution" concept expresses the philosophy that you have to take care of yourself before you can take care of others.  It's not clear that the World agrees with this ideas as much as some of us would like.  

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