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FIAP > Featured Content > Notional accounts are paygo systems in disguise
1 September, 2021

Notional accounts are paygo systems in disguise

In response to the proposals put forward in some countries for incorporating a “notional accounts” mechanism into the individually-funded pension systems, the International Federation of Pension Fund Administrators (FIAP) declares:

 

  1. Notional account systems are PAYGO systems in which the pensions of current retirees are financed with the contributions of active workers. The only difference between a pure PAYGO and a notional accounts system is that the latter includes adjustments in the way pensions are calculated, giving them certain advantages over the former, by partially narrowing the relationship between paid-in contributions and the pension amounts received.
  2. As in any PAYGO system, the notional accounts mechanism does not solve the demographic pressures issue (greater life expectancy and lower birth rates), which is exacerbated in Latin America by high rates of informality. Furthermore, it is clear that compromising future pensions, given the existing population and labor dynamics, will be at the cost of indebting countries beyond their capabilities. There will be ever fewer active workers per retiree.
  3. In notional account systems, there are no real accumulated funds belonging to workers, and they consequently do not benefit from returns on investments, as in individually-funded pension systems. The enormous advantages of obtaining returns on investments and promoting greater economic development, due to the availability of funds for long-term investment, are also eliminated.

 

Download THE FULL DECLARATION

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FIAP > Featured Content > Notional accounts are paygo systems in disguise
1 September, 2021

Notional accounts are paygo systems in disguise

In response to the proposals put forward in some countries for incorporating a “notional accounts” mechanism into the individually-funded pension systems, the International Federation of Pension Fund Administrators (FIAP) declares:

 

  1. Notional account systems are PAYGO systems in which the pensions of current retirees are financed with the contributions of active workers. The only difference between a pure PAYGO and a notional accounts system is that the latter includes adjustments in the way pensions are calculated, giving them certain advantages over the former, by partially narrowing the relationship between paid-in contributions and the pension amounts received.
  2. As in any PAYGO system, the notional accounts mechanism does not solve the demographic pressures issue (greater life expectancy and lower birth rates), which is exacerbated in Latin America by high rates of informality. Furthermore, it is clear that compromising future pensions, given the existing population and labor dynamics, will be at the cost of indebting countries beyond their capabilities. There will be ever fewer active workers per retiree.
  3. In notional account systems, there are no real accumulated funds belonging to workers, and they consequently do not benefit from returns on investments, as in individually-funded pension systems. The enormous advantages of obtaining returns on investments and promoting greater economic development, due to the availability of funds for long-term investment, are also eliminated.

 

Download THE FULL DECLARATION