Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
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Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
- 1. THE INVERTED PYRAMID: PENSION SYSTEMS IN EUROPE AND CENTRAL ASIA FACING DEMOGRAPHIC CHALLENGES Team led by Anita Schwarz and Omar Arias December 2012 1
- 2. IMPORTANT EUROPEAN ACHIEVEMENT OF PROVIDING OLD AGE SECURITY Over last century, increasing number of workers insured against risks of old age, disability, and loss of a breadwinner Insured workers and their employers paid a percentage of wage as contribution When each new group of workers joins, contribution revenue goes up, but initially since no one from the new group is eligible for benefits, no additional expenditures occur Over time as the workers who have paid become eligible for benefits, expenditures increase 2
- 3. MATURATION OF PENSION SCHEMES THROUGHOUT EUROPE Established around 1900s > Industrial workers Commerce, civil servants, salaried employeesSince 1930s > Farmers, domestic workers, self-employedSince 1950s - > Baby boomersSince 1970s - > Increased female LFP rate Since 1960s (earlier in ECA) Since 1990s in ECA - > Since 2010s - > Drop in total and formal LFP rate Post-1990s babies enter LM Maturity expected in 1960 Extended to 1990 Extended to 2000 Extended to 2010 Extended to 2020 No Extension, Added stress 1990-2030 No Extension, Added stress 2010-2050 3
- 4. LABOR FORCE GREW IN LAST CENTURY 40.25 0.45 0.65 0.85 1.05 1.25 1.45 1.65 1.85 2.05 2.25 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 Labor Force Growth (source: Peter Flora, ILO) Austria Belgium Bulgaria Denmark Finland France Hungary Italy Netherlands Norway Poland Portugal Romania Spain Sweden Switzerland UK
- 5. COVERAGE OF THE LABOR FORCE GREW AS WELL 0.2 0.4 0.6 0.8 1 1.2 1.4 1900 1910 1920 1930 1940 1950 1960 1970 percent Pension Insurance Coverage, % Labor Force Austria Belgium Denmark Finland France Germany Ireland Italy Netherlands Average Linear (Average) 5
- 6. HIGHER CONTRIBUTION RATES LED TO FURTHER INCREASES IN REVENUE 0 20 40 60 1940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012 Contribution rates in Northern Europe Sweden Netherlands Finland Norway Iceland Ireland UK Germany Switzerland 0 10 20 30 40 50 60 1940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012 Contribution rates in Southern Europe France Italy Spain Portugal Slovenia Greece 0 10 20 30 40 50 60 1940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012 Contribution rates in Central Europe and Balkans Bulgaria Poland Croatia Estonia Latvia Lithuania Hungary 6
- 7. POLICY CHOICES WHEN FLUSH WITH CONTRIBUTION REVENUES 56 58 60 62 64 66 68 70 72 1970 1975 1980 1985 1990 1995 2000 2005 2010 Male Average Effective Retirement Age Austria Belgium Denmark France Germany Italy Netherlands Spain Sweden United Kingdom 54 56 58 60 62 64 66 68 70 72 74 1970 1975 1980 1985 1990 1995 2000 2005 2010 Female Average Effective Retirement Age Austria Belgium Denmark France Germany Italy Netherlands Spain Sweden United Kingdom 7
- 8. DURATION OF RETIREMENT INCREASED FROM INCREASING LIFE EXPECTANCY AND FALLING EFFECTIVE RETIREMENT AGE 0 5 10 15 20 25 30 Belgium Spain Sweden ExpectedYearsinRetirement 1970 1990 2009 63 57 59 64 63 65 Average Effective Retirement Age Shown on Each Bar 71 67 63 Data Sources: OECD, Eurostat 8
- 9. AND PENSION SPENDING GREW 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% Pension Spending, % GDP Austria Belgium Denmark Finland France Germany Ireland Italy Netherlands Norway Sweden Switzerland United Kingdom Greece Turkey Source: OECD, Flora 9
- 10. POVERTY RATES FOR PENSIONERS LARGELY FELL RESULTING IN LOWER POVERTY RATES FOR THE ELDERLY COMPARED TO THE GENERAL POPULATION 10 -5 -4 -3 -2 -1 0 1 2 3 4 5 Gap in 1987* Gap in 2004*
- 11. NOW EUROPE IS AGING 11 0% 5% 10% 15% 20% 25% 30% 35% Ireland Iceland Norway UnitedKingdom Denmark Netherlands Sweden Finland Austria Switzerland Germany Cyprus France Belgium Slovenia Greece Spain Portugal Italy Slovakia Lithuania Poland Estonia Hungary CzechRepublic Romania Latvia Croatia Bulgaria Albania Montenegro TFYRMacedonia Serbia Bosnia&Herzegovina Armenia RepublicofMoldova RussianFederation Belarus Ukraine Georgia Tajikistan Kyrgyzstan Turkmenistan Uzbekistan Kazakhstan Azerbaijan Turkey Northern Europe Southern Europe Central Europe Balkans "Old" countries of FSU Young countries %ofpopulationovertheageof65 2010 2050
- 12. BUT MORE TROUBLING IS THE PROJECTED DECLINE IN WORKING AGE POPULATION -50.0% 0.0% 50.0% 100.0% 150.0% 200.0% Germany Switzerland Austria Netherlands Finland Denmark Sweden UnitedKingdom Norway Ireland Iceland Portugal Slovenia Italy Greece Spain Belgium France Cyprus Bulgaria Romania Latvia Poland Lithuania Croatia Slovakia Hungary Estonia CzechRepublic BosniaandHerzegovina TFYRMacedonia Serbia Albania Montenegro Georgia RepublicofMoldova Ukraine Belarus RussianFederation Armenia Azerbaijan Turkey Kazakhstan Uzbekistan Turkmenistan Kyrgyzstan Tajikistan Northern EU Southern EU Central EU Balkans (non-EU) Old Countries of FSU Young Countries 1970-2010 2010-2050 12
- 13. SOCIAL INSURANCE MODEL WHICH PROVIDED GENEROUS BENEFITS FOR SO LONG CAN NO LONGER DO SO Contributors Pensioners Generous Benefits Contributors Pensioners Not So Generous Benefits 13
- 14. LEADS TO FISCAL DEFICITS IN PENSION SYSTEMS FAR GREATER THAN DURING RECENT FINANCIAL CRISIS -7% -6% -5% -4% -3% -2% -1% % 2007 2017 2027 2037 2047 2057 2067 %ofGDP Projected Pension System Deficits in Average CE Country 14
- 15. FACED WITH THE DEMOGRAPHIC ONSLAUGHT, EUROPE HAS UNDERTAKEN LOTS OF PENSION REFORM 0% 20% 40% 60% 80% 100% 120% Northern Europe Southern Europe Central Europe Balkans (non-EU) "Old" countries of FSU Young countries percentofcountriesineachsub-region Parametric Pension Reforms 1995-2010 Increase in Contribution Rate Indexation Reforms Extension of Averaging Period Years of Service Reforms Decrease in Contribution Rate Increase in Retirement Age Changes to Benefit rate 15
- 16. ADOPTED A SMORGASBORD OF STRUCTURAL REFORMS Point System Notional Accounts Funded Defined Contribution Universal Pension Germany France (pvt sector) Romania Slovak Republic Estonia Bosnia, RS Croatia Montenegro Serbia Sweden Italy Latvia Poland Azerbaijan Kyrgyz Rep Russian Fed Turkmenistan Sweden Denmark Poland Hungary Slovak Rep Lithuania Latvia Estonia Bulgaria Romania Croatia FYR Macedonia Kazakhstan Kosovo Kyrgyz Rep Russian Fed Ireland UK Netherlands Denmark Czech Republic Georgia Kazakhstan Kosovo 16
- 17. IMPACT OF REFORMS - RETIREMENT AGES WENT UP, BUT SO DID LIFE EXPECTANCY – DURATION OF RETIREMENT DID NOT CHANGE MUCH 17 -4 -2 0 2 4 6 8 Iceland Austria Netherlands Sweden Germany Finland Ireland UnitedKingdom Switzerland Denmark Norway Belgium Slovenia Spain France Portugal Greece Cyprus Italy Bulgaria Romania Lithuania Poland Slovakia CzechRepublic Latvia Hungary Estonia Croatia Northern Europe Southern Europe Central Europe Years Change in Duration of Retirement from 2001-2009 Source: Eurostat change in effective retirement age change in life expectancy at effective retirement age
- 18. NO EFFECTIVE DECLINE IN GENEROSITY (2001-2008) -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% Germany Austria Netherlands Switzerland Finland UnitedKingdom Denmark Norway Sweden Iceland Ireland Slovenia Italy Greece Spain Belgium France Cyprus Portugal Latvia Poland Lithuania SlovakRepublic CzechRepublic Estonia Romania Hungary Northern Europe Southern Europe Central Europe percentchangebetween2001and2008 Changes in Generosity Levels (01-08): Growth in Pension Spending as % of GDP relative to growth in share of elderly population 18
- 19. GROWTH IN PENSION SPENDING PER ELDERLY PERSON RELATIVE TO GROWTH IN GDP PER CAPITA, 2001-09 19 -60% -40% -20% 0% 20% 40% 60% 80% 100% Germany Austria Netherlands Switzerland Finland UnitedKingdom Denmark Norway Sweden Iceland Ireland Slovenia Italy Spain Greece Belgium France Cyprus Portugal Latvia Croatia Poland Bulgaria Lithuania Slovakia CzechRepublic Estonia Romania Hungary Montenegro Macedonia Albania Serbia Belarus Russia Armenia Moldova Kazakhstan Turkey Kyrgyzstan Azerbaijan Tajikistan Northern Europe Southern Europe Central Europe Balkans "Old" FSU "Young"
- 20. ARE EASY SOLUTIONS POSSIBLE? Increase the working age population Fertility increases No evidence that policy measures work Even if they did, the impact of increased fertility would come too late Immigration Governments need to consider revamping immigration policies Both of these extend the pyramid Eventually the additional children will get old and need benefits as will the immigrants Only long-term solution if fertility continues to grow and immigrants continuously flow in 20
- 21. INCREASE LABOR FORCE PARTICIPATION – NOT MUCH ROOM IN PRIME WORKING AGES 21 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Ireland UnitedKingdom Netherlands Germany Norway Austria Iceland Finland Denmark Switzerland Sweden Italy Spain Greece Cyprus Belgium Portugal France Slovenia Romania Croatia Hungary Poland Lithuania Bulgaria Latvia Estonia Slovakia CzechRepublic Macedonia,TFYR Serbia Georgia Ukraine Moldova,Republicof RussianFederation Turkey Kyrgyzstan Kazakhstan Northern Europe Southern Europe Central Europe BK OC YC Labor Fore Participation Rates for the 40-44 age cohort total male female
- 22. INCREASE COVERAGE THROUGH FORMALIZATION OF THE LABOR FORCE Countries commonly blame informality of labor markets Brought the problem forward, but not the root cause Increased formality helps in short run, but makes long run deficit worse Shown in results from CGE model If the system is unaffordably generous, adding more workers adds revenue today, but makes the long term deficits worse Only improves long run if the government cheats workers, giving them low rates of return on contribution Hard to induce workers out of informality if the government is cheating workers 22
- 23. INCREASE PRODUCTIVITY Limited impact if labor becomes more productive and results in higher wages Higher wages result in higher contributions Benefits after retirement typically not indexed fully to wage growth, providing some gains Might be possible to tax growth from technical change that is not reflected in wage growth 23
- 24. ROOM FOR USING OTHER FISCAL RESOURCES IS LIMITED Consumption taxes are the main source of tax revenue in most countries On average VAT accounts for about 45 percent of government revenue Standard VAT rates between 18 and 27 percent Some room for base broadening and improved administration Corporate and Personal income taxes vary in importance On average income taxes account for 20 percent of government revenue Substantial variation in rates, base and yield Payroll Contributions also vary On average social contributions account for 25 percent of government revenue Other taxes Estate Taxes Property Taxes Other fiscal costs will also rise with aging Need to leave room for saving 0 10 20 30 40 Azerbaijan Armenia Tajikistan Kosovo Kyrgiz Republic Kazahkstan Albania Russia Turkey Georgia Macedonia Lithuania Romania Estonia Latvia Slovakia Bulgaria Moldova Poland Croatia Ukraine Czech Republic Montenegro Bosnia & Herzegovina Serbia Slovenia Belarus Hungary Percent of GDP Income Taxes Taxes on Goods and Services Other Taxes Social Security Contributions 24
- 25. LEFT WITH HARDER SOLUTIONS People will need to work longer Benefits might need to be reduced People will need to save more People need to understand these choices 25
- 26. POTENTIAL FOR “ACTIVE AGING” IS HUGE IN ECA REGION 0% 5% 10% 15% 20% 25% 30% 35% Georgia Kazakhstan Sweden Kyrgyzstan Ireland Estonia UnitedKingdom Latvia Azerbaijan Germany Lithuania Finland Denmark Moldova Portugal Netherlands Spain Bulgaria RussianFederation CzechRepublic Austria Slovakia Ukraine Luxembourg Romania Greece France Italy Serbia Croatia Belgium Slovenia Hungary Turkey Poland Potential to increase Labor Force among 45-64 year olds 45-49 50-54 55-59 60-64 Data Source: ILO 26
- 27. RETIREMENT AGES WOULD HAVE TO RISE SIGNIFICANTLY EVEN TO MAINTAIN 1970 DURATION OF RETIREMENT 27 0 5 10 15 20 25 30 Belgium Spain Sweden ExpectedYearsinRetirement 1970 1990 2009 2009 adj 72 71 67 64 74 71 65 63 63 63 57 59 Average Effective Retirement Age Shown on Each Bar
- 28. WORKING LONGER Policies to encourage active aging Opportunities for effective skills upgrading throughout working-life Adapting workplace to enable productive employment of older workers Removing barriers and disincentives to work while receiving a pension or to work part-time Facilitating labor mobility May be trade-offs between actively recruiting immigrants and having current workers work longer Will need to recognize and provide for those who are unable to work longer Tying retirement ages to life expectancy may not be enough Only corrects for longevity increases, not working age population declining 28
- 29. MAY NEED TO CONSIDER REDUCING BENEFITS Will countries be able to afford much more than prevention of old age poverty? If not, should we even bother with income differentiated pensions? Should we continue to distinguish between contributory and noncontributory pensions? Need for less drastic changes if we can start now But there will be limits to benefit reduction given the need to maintain adequate benefits At the minimum, bring the elderly up to the poverty line 29
- 30. SAVINGS BECOME CRITICAL FOR MAINTAINING BENEFIT ADEQUACY Voluntary savings programs have not been successful Building up public reserves dedicated to aging not even successful during boom years Mandatory savings (second pillars) experienced problems related to industrial organization of the pension fund industry Could not withstand fiscal pressures in the PAYG system Opt-out models for voluntary savings may be more successful Additional contributions by employees for savings may result in more robust systems 30
- 31. POLICIES TO ENCOURAGE SAVINGS Centralizing business areas with scale economies Creating competition in the portfolio management industry Designing portfolio benchmarks for pension funds in the form of lifecycle strategies Designing payout structures that insure proper risk allocation of investments, inflation, and longevity risks Considering the introduction of guarantees on the value of the contributions, if necessary, to make viable some rational risk taking by pension fund managers Designing sustainable models for the payout phase 31
- 32. POLITICAL ECONOMY People still believe that benefits can become more generous “Stealth” reforms – introducing automatic changes without explaining them to people don’t work As soon as they start to have impact, people clamor for reversals Social contract has to be renegotiated May not be fair to preserve pensions for baby boomers while punishing later generations 32