Pension system

in the Republic of Cataliua Tatyana Bogomolova

World Bank, HDNSP

April, 2013

System Design

Contribution rate: 20% from employers

Retirement age: 60 for men and 55 for women (no early retirement)

Benefit formula: generous accrual rate of 2.2% per year based on final salary

Indexation: post-retirement benefits are indexed to wage growth

No restrictions on minimum and maximum pension (for simplicity)

2

Current status

Mature system

Coverage rate: ~40% of population age 18 to retirement

System Dependency Rate: 22% (all pensioners/contributors)

Average replacement rates for existing old-age pensioners: ~ 80%

Total expenditure is 3.2% of GDP, total revenue is 34.5% of GDP and the system is in surplus

3

4

Projections:

No-Reform (Baseline) Scenario

Demographic Assumptions

Year 0 Year 5 Year 10 Year 20 Year 30 Year 60 Year 70

Male:

At Birth 63.4 65.5 66.7 68.5 69.7 70.9 75.2

At Age 65 12.4 12.7 12.9 13.4 13.7 14.2 16.0

At Retirement: 60 15.6 16.0 16.2 16.7 17.2 17.7 19.8

Female:

At Birth 69.4 71.7 73.1 75.0 76.2 77.5 81.8

At Age 60 18.2 18.9 19.5 20.3 21.0 21.7 24.3

At Age 65 14.5 15.1 15.6 16.4 17.0 17.6 20.0

At Retirement: 55 22.2 23.0 23.6 24.6 25.3 26.0 28.8

Fertility 3.1 2.8 2.4 2.3 2.3 2.2 2.1

5

Population Pyramids

Female

109 59 9 41 91

1

7

13

19

25

31

37

43

49

55

61

67

73

79

85

91

97

Year 0

109 59 9 41 91

1

7

13

19

25

31

37

43

49

55

61

67

73

79

85

91

97

Year 70

6

Macroeconomic Assumptions

Year 1 Year 10 Year 20 Year 30 Year 40 Year 70

Real GDP growth 5.0% 4.5% 4.0% 3.5% 2.2% 2.2%

Inflation 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Real wage growth 2.2% 2.1% 2.4% 2.4% 2.0% 2.0%

7

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Baseline: Population (thousand persons)

total population age 0-14 age 15-ret.age ret.age+8

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Baseline: Number of System Members (thousand persons)

contributors all pensioners9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Baseline: System Dependency Rate

(number of pensioners/number of contributors)

old age pensioners all pensioners10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Baseline: Average Replacement Rates for Old Age Pensioners

(% of average wage)

new pensioners all existing11

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Baseline: System Finances, % of GDP

revenues expenditures balance12

Key Issues

Growing total dependency rate due to population aging: from current 22% to 83% in the long-run

Generous benefit formula (high accrual rate, final salary feature)

Expensive indexation policy

System is financially unsustainable: deficits reach 10% of GDP in the long-run

So, risk of defaulting on the promise in the future is high

Estimated IPD: ~ 140% of GDP (at 4% real discount rate)

Large uncovered population (farmers)

13

Sensitivity Tests

Reform 1: increasing contribution rate from 20% to 25%

Reform 2: decreasing accrual rate from 2.2% to 1.5%, applied to post-reform years

Reform 3: gradual increase in averaging period from last year to lifetime average earnings valorized to wage growth

Reform 4: switching from wage to price indexation of pensions

Reform 5: increasing retirement age from 60/55 for men/women to 65 for both genders over the next 20 years and then in line with life expectancy (to 69 by 2080)

14

15

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 1: Raising Contribution Rate

Annual Current Balance, % of GDP

baseline reform 1

16

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 2: Decreasing Accrual Rate

Average Replacement Rates for New Old Age Pensioners

(% of average wage)

baseline reform 2

17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 2: Decreasing Accrual Rate

Average Replacement Rates for All Old Age Pensioners

(% of average wage)

baseline reform 2

18

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 2: Decreasing Accrual Rate

Annual Current Balance, % of GDP

baseline reform 2

19

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 3: Increasing Averaging Period

Average Replacement Rates for New Old Age Pensioners

(% of average wage)

baseline reform 3

20

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 3: Increasing Averaging Period

Average Replacement Rates for All Old Age Pensioners

(% of average wage)

baseline reform 3

21

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 3: Increasing Averaging Period

Annual Current Balance, % of GDP

baseline reform 3

22

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 4: Switching from Wage to Price Indexation

Average Replacement Rates for All Old Age Pensioners

(% of average wage)

baseline reform 4

23

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 4: Switching from Wage to Price Indexation

Annual Current Balance, % of GDP

baseline reform 4

24

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 5: Raising Retirement Age

System Dependency Rate

(number of all pensioners/number of contributors)

baseline reform 5

25

0%

20%

40%

60%

80%

100%

120%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 5: Raising Retirement Age

Average Replacement Rates for New Old Age Pensioners

(% of average wage)

baseline reform 5

26

0%

20%

40%

60%

80%

100%

120%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 5: Raising Retirement Age

Average Replacement Rates for All Old Age Pensioners

(% of average wage)

baseline reform 5

27

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Reform 5: Raising Retirement Age

Annual Current Balance, % of GDP

baseline reform 5