Optimal Notional Defined Contributions

Notional Defined Contributions (NDC) systems mimic the incentive structureof fully funded social security while preserving the Pay-as-you-go nature ofmost current systems. We study size-preserving social reforms which replacethe current US system with alternative NDCs with many alternative contributionrules and deficit/GDP ratios. If one retains the current mandatory ageindependentcontribution rules we find change to an NDC to reduce welfare:the sacrifices in distributive and insurance properties are not compensated bythe efficiency gains. NDCs are, however, flexible enough to allow for alternativecontribution rules which increase welfare while preserving actuarial fairness.Contributions ought to be age-dependent and concentrated later on a worker’scareer. The incentive structure induces an increase in capital accumulation thatresults, through general equilibrium effects, in welfare gains which are largerfor low productivity workers, despite the increase in income inequality as capturedby the Gini coefficient