This paper develops a multistate overlapping generations model (MOLG) that integrates oldage and permanent disability into a generic NDC framework. In the model, the account balances of participants who do not survive are distributed as inheritance capital to the accounts of the (non-disabled) active survivors on a birth cohort basis. The model includes realistic demography insofar as it takes into account an age schedule of mortality and the uncertainty concerning the timing of disability, and allows for changes in the economically active population and for a large number of generations of contributors and pensioners to coexist at each moment in time. The results achieved in the numerical example we present endorse the fact that the model really works and show an optimal integration of both contingencies into the NDC framework. The model could be linked to real practices in social security policies because, to mention just a few positive features, it could be implemented without much difficulty, it would help to improve actuarial fairness, it would uncover the real cost of disability and minimize the political risk of disability insurance being used as a vote-buying mechanism.
- Manuel Ventura-Marco and Carlos Vidal-Meliá