Ricerc@Sapienza

Since the mid 1990s some European countries (including Italy) implemented a Notional
Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go
funding, while the pension amount is a function of the individual lifelong contribution.
Despite many appealing features, the NDC system presents some drawbacks: first, it is
vulnerable to demographic and economic shocks compromising the financial sustainability;
second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce
the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and
also implemented in Sweden, while solutions that combine financial sustainability and social
adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to
insert into the Italian NDC architecture ABMs that preserve social adequacy under financial
sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built
ABMs for a Defined Benefit pension system using nonlinear optimization techniques to
calculate the optimal paths of the control variables representing the main drivers of the
system: contribution rate, retirement age and indexation of pensions. Following this line
of research, we have developed a nonlinear optimization model for the Italian NDC system
based on three control variables: pensions indexation, notional rate and contribution rate. The
objective function considers both social adequacy and contribution rate sustainability, under
liquidity and sustainability constraints. In the numerical applicationwe apply the model to the
Italian pension system and test the sensitivity of the results to different economic scenarios
and objective function parameters.