The financial stability of notional account pensions

A number of European countries are reforming their pension benefit formulas by adopting "notional" accounts. These accounts are used to determine indi vidual benefits, but pay-as-you-go financing is retained. This paper addres ses the belief that by choosing adjustment rules cleverly, notional account s can provide automatic financial equilibrium in the short run. If this wer e true, it would be a valuable advantage in terms of insulating the governm ent budget from demographic pressures, while insulating the pension budget from fiscal pressures. It is shown that notional account benefit formulas c annot provide automatic financial equilibrium in the short run. The paper a lso suggests that if indexing rules are chosen in a particular way, and sho cks revert rapidly to a mean, the pension institution may achieve financial stability in the long run. However, long-run stability is unlikely to be v aluable because political interference occurs in the short run.