The strengths and failures of incentive mechanisms in notional defined contribution pension systems

Public pension systems based on the Notional Defined Contribution (NDC) principle were introduced during the ‘90s in Italy, Sweden and Poland. They should realize actuarial equity and incentive neutrality. However, when one considers the presence of NDC pensions together with minimum and social assistance pensions, this is no longer true and a regressive feature of NDC systems emerges. We examine the extent of such incentive problem in all three countries mentioned and discuss how it could be addressed by changing the cumulation rules for social assistance and NDC pensions. In the Italian case, the use dynamic micro-simulation model, allows us to examine the incentive issue also in its distributive and financial aspects. The same model allows us to also assess some major effects of the December 2011 pension reform, which, however, being very prescriptive, could show some side-effects on the incentive and distributional aspects we focus on.