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Pension Challenges and Pension Reforms in OECD Countries
Peter Whiteford
Social Policy Division
OECDEmail: [email protected]
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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.