Increasing longevity, NDC implementation in Italy and Sweden, and all that
| Published date | 01 September 2023 |
| DOI | http://doi.org/10.1177/13882627231176537 |
| Author | Sandro Gronchi,Sergio Nisticò,Mirko Bevilacqua |
| Date | 01 September 2023 |
| Subject Matter | Articles |
Increasing longevity, NDC
implementation in Italy
and Sweden, and all that
Sandro Gronchi
Sapienza University of Rome, Italy
Sergio Nisticò
University of Cassino and Southern Lazio, Italy
Mirko Bevilacqua
CreaM Economic Research Center (University of Cassino and Southern Lazio) and Inarcassa, Italy
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.
Keywords
NDC, increasing longevity, divisors, fairness, sustainability
H55, J26
Corresponding author:
Sergio Nisticò, University of Cassino and Southern Lazio, Italy.
Email: s.nistico@unicas.it
Article
European Journal of Social Security
2023, Vol. 25(3) 261–287
© The Author(s) 2023
Article reuse guidelines:
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DOI: 10.1177/13882627231176537
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Introduction
From the early 1990s, the gloomy demographic forecasts in the OECD countries contributed to a
widespread awareness that population ageing would be a serious threat to the financial solvency of
public pension systems. It is no surprise, therefore, that many countries underwent (and are still
undergoing) severe and socially painful reforms that, to avoid further increases in the contribution
rates, counteract the upward trend in the dependency ratio by raising the retirement age and/or
cutting the pension level through less generous first pension rules and slower indexation of those
already in payment. In the same period, and in particular in Italy and Sweden, analysis of the
earnings-related pension rules revealed marked, opaque and regressive disparities generated by
the typical defined benefit (DB) version of public, pay-as-you-go (PAYG) systems (Ministero
del Tesoro –Ragioneria Generale dello Stato, 1994; The Pension Group - Ministry of Health
and Social Affairs, 2009).
Concurrently, the widespread and debatable belief that funded systems are immune to worsening
demographic conditions helped bring to the attention of experts and policymakers the Chilean suc-
cessful transition from a PAYG-DB to a fully funded, defined contribution (FDC) system based on
personal accounts. Many others, however, doubted the effectiveness of the solution while also
pointing to the difficulty, outside Chile, of resolving the problem of the ‘double contribution’to
be charged in the transition phase, to pay off the debts of the old PAYG system while accumulating
funds in the new system.
1
In the dispute between PAYG-DB and FDC, the notional or non-financial
defined contribution (NDC) proposal was to transplant the working of personal accounts, typical of
fully funded systems, into the body of PAYG financing. In fact, the advocates of the proposal
stressed its potential for achieving the twofold aim of remedying the above-mentioned unfairness
of DB systems while endowing PAYG financing with the automatic adjustments typical of the per-
sonal account DC mechanisms. A third, collateral goal of the NDC scheme, which derives from
one-to-one correspondence, is to allow flexibility in the retirement age given the transparent link
between the amount of the pension and the life expectancy of retiring workers (Gronchi, Nisticò,
and Bevilacqua, 2019).
In Italy, the new ideas started to circulate in a small circle of academics (Gronchi 1994 b, 1995a,
1995b), and were finally enacted, with the shortcomings analyzed below, in the 1995 Dini reform,
approved by a large majority of political parties and with the unanimous consensus of the trade
unions. In the same years, NDC ideas had also been emerging in Sweden and in other countries
of Northern Europe where, between 1996 and 1999, three NDC reforms were approved in
Latvia, Sweden and Poland. The reform adopted in Norway in 2011 was also inspired by the
‘Swedish philosophy’.
In fact, it was the accuracy and intellectual sophistication of the later Swedish reform that
attracted the interest of the academic community and the international institutions to NDC
systems. In particular, the World Bank, in collaboration with the Swedish Social Security
Agency, organized three international conferences and published as many collections of papers
(Holzmann and Palmer, 2006), (Holzmann et al., 2012), (Holzmann et al., 2019). The last of the
three conferences was held in Rome at the Istituto Nazionale Analisi Politiche Pubbliche
1. For a summary of the debate among advocates and opponents of the transition from a PAYG to a funded system (either
private or public), see Nisticò (2019, pp. 110–113).
262 European Journal of Social Security 25(3)
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