Notionally Defined Contributions or Private Accounts in Eastern Europe: A Reconsideration of a Consecrated Argument on Pension Reform

Abstract

This article is concerned with what determines a government’s choice of pension reform. It starts from an argument by Myles and Pierson that claims that the newer pension systems are able to privatize whereas the older, matured systems faced with the double payment problem tend to adopt notional defined contributions (NDC) accounts. This argument is retested with in-depth qualitative analysis of the pension reforms in Latvia and Poland. The analysis brings three main contributions. First, it shows that within the matured camp the double payment problem is visible at different degrees. The systems with little visibility, although mature, can still privatize. Second, it shows that the NDC option is fit to deal with more urgent fiscal problems, whereas the privatization option is fit for long-term demographic problems. Third, the analysis finds that the two options in Myles and Pierson’s argument can be used by governments symbiotically.