Increasing longevity, NDC implementation in Italy and Sweden, and all that

Abstract

The aim of the paper is twofold. First, it addresses the delicate issue of divisor obsolescence within Non-financial Defined Contribution (NDC) pension schemes. It suggests a method to measure the impact of this obsolescence, referring to the Swedish mechanism of diversifying divisors by birth cohort. Given the serious impact of divisor obsolescence on the fairness and sustainability of NDC systems, the paper also proposes possible solutions to limit this impact. The second aim is to analyze the shortcomings of the Italian system in the light of the challenge to NDC architecture resulting from the obsolescence of divisors. The first anomaly is the current mechanism of periodical revision of the divisors, which prevents Italian workers from planning their retirement on the basis of definite and unchanging information. The second is the extremely wide retirement age range due to the existence of seniority pensions: this needs to be replaced by a small retirement age range with a sufficiently high and rigorous lower bound. Finally, the paper focuses on the need for all NDC systems to compute new divisors based on a much lower frontloading rate, as has recently been done in Norway. It finally suggests that the severe reductions in the replacement rates implied by a lower ‘frontloading’ can be avoided by either removing the survivors benefit from the old-age scheme or by giving workers the option to choose it ‘at their own expense’, as in the second pillar.