Pension Reforms Revisited - Institute and Faculty of Actuaries · Pension Reforms Revisited Asta...
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9/8/2011
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Pension Reforms RevisitedAsta Zviniene
Sr. Social Protection Specialist
Human Development Department
Europe and Central Asia Region
World Bank
All Countries in the Europe and Central
Asia Region Have Undertaken Reforms
Reforms have
resulted in varied
system designs
Reforms have taken
various pillar
configurations
195
42
Types of PAYG systems in ECA
region
Conventional
PAYG
Point system
Notional
accounts
None
1511
2
Pillar Configuration of ECA
Pension Systems
First Pillar
only
First and
Second
Second Pillar
only
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First Pillar Reform Experience –
Retirement Ages:
Effective retirement ages have increased
◦ for new EU member states the average retirement age in the last
two decades has moved from around 56 to 60
but …
◦ life expectancy at 56 in 1990 has been 20.8; now at 60 it is 20.3
◦ women still generally allowed to retire earlier than men
◦ early retirement allowed for substantial part of the population
◦ disability provisions still generous in some cases
First Pillar Reform Experience –
Pension Spending:
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
20082007200620052004200320022001200019991998199719961995
old age pension spending per 65+ population
compared to GDP per capita
Hungary
Romania
Estonia
Lithuania
Bulgaria
Latvia
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EU Pension Spending (% of GDP)EuroStat, 2007
o New EU members spend less (8% versus 12%). OECD spends 7.2%.
o New EU members have fewer over 65 year olds, lower contributor base
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
New
EU
mem
bers
All
EU
Euro
are
a
Irela
nd
Lat
via
Est
onia
Rom
ania
Lithuan
ia
Cyp
rus
Icela
nd
Bulg
aria
Slova
kia
Norw
ay
Cze
ch R
epublic
Luxem
bourg
Spai
n
Mal
ta
Slove
nia
Hunga
ry
United K
ingd
om
Belg
ium
Denm
ark
Fin
land
Pola
nd
Sweden
Gre
ece
Neth
erl
ands
Germ
any
Switze
rlan
d
Port
uga
l
Fra
nce
Aust
ria
Ital
ySecond Pillar Reform Experience:
People Like the Individual Accounts
9%
70%
21%
3%
66%
30%
15%
73%
13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Support Don't support I have not heard
All
Women
Men
What is the public opinion with respect to reduction in contribution to 2nd pillar? (from Swedbank in Latvia)
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Rates of Return Have Been Reasonable
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Real RoR until 2007
RoR until 2007
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
Estonia Lithuania Slovak Republic
Poland Hungary
Real RoR 2008-10
2008
2009
2010
Funded Pillars Allow to Pre-pay
Future Obligations of Public System
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
% o
f G
DP
Projected Pension System Deficits
Without funded pillar
With funded pillar
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Financial Crisis Has Led to Some
Reform Reversals Financial crisis led to loss in revenues
◦ Contribution revenue fell
◦ Pension expenditures rose as the unemployed turned to disability and early retirement
◦ Overall fiscal revenue declined making the financing of pension deficits more difficult
Many of the added generosities in the first pillar have been removed
Partial or complete reversal of second pillars
◦ Hungary – nationalized the pension funds
◦ Latvia – reduced second pillar contributions from 8% to 2%
◦ Lithuania – reduced second pillar contributions from 5.5% to 2% - now proposes that if individual is willing to put in an additional 2%, the government will match that voluntary amount
◦ Estonia – redirected state contributions to second pillar to first pillar in 2009 and 2010, but has now returned to 2% in 2011 and will rise to the original 4% in 2012
◦ Romania – postponed planned increase in second pillar contribution in 2010, but has begun raising the contribution rate in 2011
◦ Poland – proposed reducing second pillar contribution from 7.3% to 2.3%, with the possibility of an increase in the future
Other countries are adding or considering adding second pillars
◦ Czech Republic, Slovenia, Ukraine, Armenia
What Would be the Consequences of 2nd pillar Contribution Reduction? (Swedbank, Latvia)
7%
2%
6%
9%
15%
18%
19%
24%
0% 5% 10% 15% 20% 25% 30%
Other
Higher social security
payments in the future
Incentive to care by myself
Consider leaving the country
Reduce motivation to pay
taxes
Reduce future pension
Consider to pay taxes
elsewhere
Destroy trust in pension
system
High risk of tax
avoidance
Source: Snapshots questionnaire August 2010
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Unexpected Outcomes from
Second Pillars Not as immune to political interference
as hoped
Limited financial literacy limits competition among funds
Debt-financing of transition costs has led to unsustainable debt levels
Management of pension funds costlier than expected in some countries
Overly conservative portfolios have led to lower rates of return
What are these Reforms and Reversals
Trying to Achieve?
Objectives of pension system:◦ alleviate poverty in old age
◦ provide a mechanism for individuals to partially replace their wage income
◦ are there enough resources to achieve both?
Stability of the pension policy requires that pensions are:◦ affordable in the short and long run
◦ seen as adequate
◦ seen as fair, both inter-generationally and intra-generationally
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New Realities for Central Europe
EU accession and increased market integration
Tighter enforcement of the Stability and Growth Pact
New fiscal challenges arising from slower growth following the financial crisis
Disillusion with “miracle” cures in pension systems
Starker demographics
◦ Sharper decline in fertility
◦ Prolonged emigration
◦ Persistent informality
Fertility Rates Have Dropped by a
Third Between 1990 and 2010
50%
60%
70%
80%
90%
100%
110%
20102005200019951990
Number of Children under 5 compared to 1990
Euro area (15 countries)
10 new members
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Working Age Population is Shrinking
Due to Emigration
70.00%
80.00%
90.00%
100.00%
110.00%
120.00%
130.00%
Shrinking number of 30-35 year
olds remaining in central Europe
Resulting Decline In Working Age
Population
0%20%40%60%80%
100%120%140%160%180%200%
Alb
ania
Arm
enia
Aze
rbaijan
Belaru
sB
osn
iaB
ulgaria
Cro
atiaC
zech
Republic
Esto
nia
Georgia
Hungary
Kazak
hstan
Kyrgyz R
epublic
Latvia
Lith
uan
iaM
acedonia
Mold
ova
Monte
negro
Polan
dR
om
ania
Russian
Federatio
nSe
rbia
Slovak
iaSlo
venia
Tajik
istanTu
rkey
Turk
menistan
Ukrain
eU
zbekistan
2010 2050
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Aging of the Population
Percentage of the population over 65
0
5
10
15
20
25
30
35
2010
2050
Central Europe Had Unusually High
Coverage Rates Prior to Transition
0.0
20.0
40.0
60.0
80.0
100.0
120.0
0 5 10 15 20 25 30
Co
ntr
ibu
tors
as
% o
f L
abo
r F
orc
e
Per Capita Income on PPP Basis
Relationship between Per Capita Income and Contributor Coverage
ECA Average
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These Factors Add up to significant
Increase in Future Obligations
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
% o
f G
DP
Projected Pension System Deficits
Without funded pillar
With funded pillar
Before dismantling the second pillar, useful to
have social dialogue on other options
Want to avoid instability and loss of credibility in policy making
Alternatives:
◦ adjust expectations on what is adequate / fair
◦ raise retirement ages further
◦ lower benefits further to be supplemented with voluntary savings
◦ actively seek immigration from areas with unemployed youth
◦ shift some income unrelated benefits to general budget
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End of 19th – beginning of 20th century - > Civil servants,
occupational schemes
Workers in industry
and commerce
Before World War II- >
Farmers, domestic workers,
self-employedSince 1950s - >
Increased female LF participation, higher
retirement ages, baby boomers
Since 1960s - >
21st century:
Where to find new recruits? - >
What happens if they can not be found?
Immigrants? Mothers of young children?
Young retirees? Partially disabled?
Is Status Quo Fair / Sustainable?
Coverage & Retirement Age,
Selected Countries
55
57
59
61
63
65
67
69
0%
10%
20%
30%
40%
50%
60%
70%
80%
Pola
nd
Bulg
aria
Gre
ece
Fra
nce
Belg
ium
Germ
any
Fin
land
Aust
ria
Neth
erl
ands
United …
Sw
eden
United S
tate
s
Norw
ay
Sw
itze
rlan
d
Age
Coverage
Earliest
retirement
age
Ret. age
trendline
o Coverage is typically calculated as number of contributors over
population aged 20-65
o Surest option to increase coverage statistic is to increase retirement age
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Belarus: Majority of People at Current
Retirement Age Are Able to Work
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
55-59, male
60-64, male
65-69, male
55-59, female
60-64, female
65-69, female
fully retired
working
pensioners
not yet retired51%
30%47%26% 17%
o 71% of early retirees continue to work (why have this scheme at all?)
o Disability and unemployment programs would provide a safety net
Lithuania: 50% of Population Continue
Working after Reaching Retirement Age
0%
20%
40%
60%
80%
100%
120%
55 56 57 58 59 60 61 62 63 64 65
Men
0%
20%
40%
60%
80%
100%
120%
55 56 57 58 59 60 61 62 63 64 65
Women
0%200%
55 56 57 58 59 60 61 62 63 64 65
contributors disabled, not working
working pensioners and disabled pensioners not working
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Life Expectancy at Age 65EuroStat, 2007
12
13
14
15
16
17
18
19
20
21
o Old EU members:19; new EU members: 16. Selected FSU: 15 – not such a
big difference! Compare with 10+ year gain in less than 40 years in OECD
or 4 year gain in 20 years in new EU member states
Life Expectancy at Statutory Retirement AgeEuroStat, 2007
Men Women
o New EU member states and FSU can not afford retirement lengths of old
EU members; even old EU members can not afford them and are starting to
reform
o Gender difference in old member states: 4.6; new member states 5.4; FSU:
7.4 years
12
14
16
18
20
22
24
26
12
14
16
18
20
22
24
26
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Raise Retirement Ages
Need a social consensus that people cannot continue to retire young
May need to consider modifications more applicable to an aging workforce – for example, part-time work, pay scales, etc.
May need to include lifelong learning and retraining opportunities
Clearly a win-win-win proposition◦ Labor force expands
◦ Number of retirees are reduced
◦ Pension adequacy is maintained
Raise Retirement Ages to 70 by 2047
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
2061
2063
2065
2067
2069
2071
2073
2075
Projected Deficits with Retirement Age Increase
Current
Ret Age Ad
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OECD: Average Pension / Net Average Wage for Full
Career Workers looks generous, but…
0
20
40
60
80
100
120
Pen
sion
/Ave
rage
Wag
e
o Requires 45 year career
o Many of these OECD schemes are not sustainable and will have to be
reformed
OECD Accrual Rates
0 0.5 1 1.5 2 2.5 3 3.5
TurkeySpainMalta
PortugalItaly
AustriaFrance
LuxNetherlands
FinlandBelgium
KoreaSwedenIceland
SwitzerlandUS
HungaryGermany
NorwayJapan
CanadaUK
o Average accrual rate of <1.5% suggests that a 45% gross benefit
after 30 years of service is considered reasonable in OECD. Pensions
can only be higher with substantially longer careers
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Indexation Price Indexed
Belgium, Canada, France, Iceland, Italy, Japan, Portugal, Spain, UK, US
Discretionary
Austria, Greece, Luxembourg, Sweden
80% Price-20% Wage
Finland
50% Price-50% Wage
Switzerland
Wage Indexed
Denmark, Germany, Netherlands, Norway
Price, 10
Discreti
onary, 4
80-20, 1
50-50, 1
Wage, 4
Price Indexed
Azerbaijan, Serbia, Turkey, Uzbekistan, Latvia, Bulgaria
Discretionary
Albania, Armenia, Georgia, Kazakhstan, Russia, Lithuania
Dependant on GDP growth
Hungary, Estonia
80% price-20% wage
Poland, Ukraine
2/3 price-1/3 wage
Czech Republic
50% price-50% wage
Croatia, Slovak Republic, Macedonia, Moldova, Montenegro
100% wage
Belarus, Bosnia, Romania, Slovenia, Tajikistan
price, 6
discretionary, 6
dependant
on GDP, 280-20,2
67-33, 1
50-50, 5
wage, 5
OECD
ECA
Changes in Pension Indexation
Focus should be on maintaining the pensioner’s absolute consumption basket in retirement
With declining labor force, relatively sharp increases in productivity and consequently, wages, are hoped for to help mitigate the impact of demography on the wage bill
If these increases are directly shared with pensioners, when wages increase to alleviate the reduction in number of workers, benefits will be raised, resulting in much larger fiscal problems
Focus of public system has to be on poverty alleviation and not on maintaining relative position of pensioner
To be complemented with additional savings by workers if desired
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Reduce Benefit Levels By
Approximately 40%
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)2011
2015
2019
2023
2027
2031
2035
2039
2043
2047
2051
2055
2059
2063
2067
2071
2075
Projected Deficits with
Benefit Decrease
Current Ben Level Adj
.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2011
2015
2019
2023
2027
2031
2035
2039
2043
2047
2051
2055
2059
2063
2067
2071
2075
Projected Benefit Levels
Relative to Average Wage
Current Ben Level Adj
Funded Pillar
o Diversification of risk is still relevant◦ Timing of shocks to financial asset prices considerably
different than timing of crisis on PAYG benefit levels
o Aging of population◦ Benefit levels will likely fall further in the future
◦ To maintain adequacy of benefits, will need to save either on voluntary or mandatory basis
o But need to have adequate preparation◦ Fiscal space
◦ Adequate financial markets
◦ Adequate supervision and regulation
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Forthcoming World Bank Report
Looks at what actually happened in the
reform countries in the last 20 years
Aims to contribute to the dialogue on
how each country can best move forward
Thank You