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Pension Challenges and Pension Reforms in OECD Countries

Peter Whiteford

Social Policy Division

OECDEmail: Peter.Whiteford@oecd.org

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Issues and Outline

The challenges of population ageing The demographic and labour market context Pension systems in OECD counties Pension reforms Is there an optimum system?

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Korea currently spends relatively little on retirement pensions

0

2

4

6

8

10

12

14

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Populations are ageing Figure 1: Share of the population aged 65 and over, 2000 and 2050

% o

f pop

ulat

ion

aged

65 a

nd o

ver

0

5

10

15

20

25

30

35

40

2000 2050

5

Cash benefits are strongly age-related

0%

100%

200%

300%

400%

500% Germany

Finland

France

United Kingdom

0%

100%

200%

300%

400%

500% Italy

Luxembourg

Norway

Sweden

United States

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… and, pension spending will increase in most countries

a) For France, the estimates refer to the period 2000-2040.

Source: National source for Austria and OECD Economic Outlook (n° 69-2001).

Figure 3: Public expenditure on old-age pensions in OECD countries, 2000-2050a

Levels as a percentage of GDP, changes in percentage points

Levels in 2000 Change between 2000 and 2050

0 2 4 6 8 10 12 14 16 -4 -2 0 2 4 6 8 10 12

Korea

Australia

United Kingdom

United States

New Zealand

Norway

Canada

Netherlands

Hungary

Denmark

Czech Republic

Japan

Portugal

Finland

Belgium

Sweden

Spain

Poland

Germany

France

Italy

Austria

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Many countries will see shrinking labour forces

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The potentially mobilisable labour force varies in size

Excess inactivity and unemployment as % of population 15 to 64, except students

0

5

10

15

20

25

30

35

40

Icel

and

Nor

way

Sw

eden

Sw

itzer

land

Den

mar

kU

nite

d S

tate

sP

ortu

gal

Japa

nC

anad

aF

inla

ndU

nite

d K

ingd

omC

zech

Rep

ublic

Net

herla

nds

Fra

nce

Aus

tralia

Ir

elan

dG

erm

any

Aus

tria

bB

elgi

umLu

xem

bour

gS

pain

Hun

gary

Gre

ece

Pol

and

Slo

vak

Rep

ublic

Mex

ico

Italy

Tur

key

9

Older people are a large share of the mobilisable labour force

Persons 50-64 as % of mobilisable labour resources

0

10

20

30

40

50

60

70

80

Mex

ico

Tur

key

Sw

itzer

land

Japa

nU

nite

d S

tate

sN

orw

ayS

lova

k R

epub

licS

wed

enS

pain

Aus

tralia

P

olan

dIr

elan

dU

nite

d K

ingd

om Italy

Can

ada

Gre

ece

Hun

gary

Fin

land

Fra

nce

Por

tuga

lC

zech

Rep

ublic

Luxe

mbo

urg

Den

mar

kG

erm

any

Net

herla

nds

Bel

gium

Aus

tria

10

Real dependency depends on employment

0

20

40

60

80

100

120

140

160

Standard dependency ratio Employment-adjusted

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A very wide range of employment levels across OECD countries

% of men aged 50 to 64 years in employment, 2004

0

10

20

30

40

50

60

70

80

90

100

Pol

and

Luxe

mb

ourg

Bel

gium

Aus

tria

Italy

Fra

nce

Ger

man

yF

inla

nd

Net

herla

nds

Gre

ece

Cze

ch R

epub

licS

pain

Por

tuga

lA

ustra

liaO

EC

DC

anad

aIr

elan

dU

nite

d K

ingd

omU

nite

d S

tate

sD

enm

ark

Sw

eden

Nor

way

New

Zea

land

Sw

itzer

land

Japa

nM

exic

oIc

elan

d

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Men retire before pension age in many countries

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As do women, but not in Korea

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Illness or disability is a major cause of inactivity at older ages

Source: European Union Labour Force Survey for European countries; national labour force surveys for other countries.

Figure 6: Incidence of inactivity because of illness or disability in OECD countries (aged 50-64), 2003

Percentages

Men

Ireland

Austria

Italy

Greece

Iceland

France

Canada

Portugal

Germany

Switzerland

Luxembourg

Belgium

United States

Spain

OECD

Denmark

Czech Rep.

Australia

Netherlands

Hungary

Slovak Rep.

Sweden

United Kingd.

Norway

Finland

Poland

0 2 4 6 8 10 12 14 16 18 20 22 24

Women

Ireland

Austria

Greece

Italy

France

Canada

Germany

Luxembourg

Spain

Australia

Switzerland

Belgium

Portugal

United States

Czech Rep.

OECD

Slovak Rep.

Iceland

Hungary

United Kingd.

Denmark

Finland

Netherlands

Sweden

Poland

Norway

0 2 4 6 8 10 12 14 16 18 20 22 24

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Disability and disability pensions

The prevalence of disability for people aged 50 to 64 years is nearly twice as high as for the working-age population generally

Employment rates for people with disabilities are only around 40%—45%

Older disabled people have lower employment rates than younger people with disabilities

Across OECD countries benefit recipiency rates average 5.5%, but are close to 8-9% in Denmark, Norway, Sweden and the Netherlands

Roughly one in four persons who are not employed receive disability benefits

People over 45 are 70-90% of the stock of disability beneficiaries, and similar proportions of inflow to benefits

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Social protection and retirement disincentives

Low official pension eligibility ages or implicit penalties for working longer in public pension schemes (sometimes in defined benefit occupational pensions)

Early retirement schemes introduced to deal with unemployment

De facto early exit schemes through sickness, disability or more generous unemployment benefit schemes

Interactions between tax and benefit systems

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Retirement incentives – how to measure them

Replacement rates

Change in pension wealth from working an extra year

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Replacement rates vary by earnings histories

0

1020

30

40

5060

70

8090

100

Aus

tralia

Aus

tria

Can

ada

Den

mar

k

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Italy

Japa

n

Nor

way

Pol

and

Spa

in

Sw

eden

Uni

ted

Kin

gdom

Uni

ted

Sta

tes

Low Average High

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Pension systems and retirement incentives – important parameters

Normal and early retirement ages Qualifying conditions – periods of residence or

contributions Measures of earnings – final, lifetime average or

other Adjustments for early or late retirement Penalties for earning or combining pensions and work

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Pension reforms – some examples Changes in the number of years used in benefit calculation.

Individual earnings are measured in different ways: measures include earnings in the last (few) year(s) of employment, earnings over a number of best years, or life-time earnings. In the past, the last few years of earnings were commonly used to calculate public pension benefits. Today, many countries have moved towards the use of life-time earnings.

Changing the valorisation of past earnings. Pension benefits have also been made less generous through changes in ways in which past wages enter into the benefit calculation. In many public pension systems, past earnings are re-valued to take account of changes in living standards between the time pension rights accrued and the time they are claimed. Some countries have recently moved from earnings to price-valorisation or to a mix of wages and prices. Changes in valorisation can strongly influence benefit levels, since prices tend to rise more slowly than wages.

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Pension reforms – some examples Changing indexation of pensions in payment. Some

countries have moved from indexation to earnings towards full or partial indexation to prices. This means the purchasing power of pensions is preserved, but pensioners are not participating in increasing living standards enjoyed by workers. When poverty thresholds are set in relation to household income, price indexation leads to higher relative poverty rates among pensioners as the economy grows.

Linking pensions to higher life expectancy. Several countries have changed benefit formulae to include a factor reflecting increases in life expectancy at retirement. Incorporating such a factor is particularly simple in the notional account systems that have been introduced in recent years in some countries. Explicit links between life expectancy and pension benefits have also been introduced in defined benefit systems. The impact of these measures has varied depending on the parameter chosen, but have generally lowered the amount of public pension benefits paid to current and future generations of retirees.

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Pension reforms – changing retirement incentives

Increasing pension age for women – Australia, Austria, Belgium (private sector), Hungary, Portugal, Switzerland, United Kingdom

General increases in retirement ages - Czech Republic, Greece, Japan, Korea, New Zealand, Sweden, USA

Adjusted retirement incentives – Australia, Austria, Belgium, Denmark, Finland, France, Germany, Italy, Portugal, Spain, Sweden, United Kingdom

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Conclusions

Multiple policy responses required to meet the challenges of population ageing

Increase employment among older workers, mothers, people with disabilities and unemployed and welfare recipients

Address employer practices, discrimination; strengthen skills; immigration

Pension and benefit reform only one part of the response.

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Conclusions

Recent increases in employment of older men, except in Germany, Greece, Italy, Poland and Turkey (also Iceland, Japan, Korea and Switzerland, but employment levels very high)

Older women have seen increases in employment more generally, except Greece, Korea, Poland and Turkey

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Conclusions

For older men, no OECD country has employment levels back at 1980 levels (except perhaps Denmark and New Zealand)

New Zealand reforms from 1991 apparently very successful:– Employment of males aged 60-64 years rose from 36% to

65% between 1991 and 2001– Employment of women aged 60-64 rose from 17% to 41%

over same period– But question of what made this feasible and successful.

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Conclusions

Reform proposals need to build on existing systems and be sensitive to specific country context

NDC systems tend to have good incentives to continue employment

So do systems with basic pension, and mandatory or quasi-mandatory pillars

Careful design of first pillar or of means of guaranteeing minimum incomes is important, and complexity should be avoided

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Final conclusions

Ending early retirement schemes is of central importance, as many people choose to retire at earliest age available

Flexibility in choice of retirement age desirable, but decrements for early retirement and increments for later retirement should be actuarially neutral, a condition not necessarily always met

Need to monitor and control disability benefits, and separate support from assumption that people with disabilities are incapable of work.