Pensions Core Course 2013: Adequacy and Sustainability of Contributory and Non-contributory Pensions - An ILO View
Adequacy and Sustainability of Contributory andNon-Contributory Pensions: An ILO ViewApril 4, 2013Krzysztof HagemejerInternational Labour Office
Contents• How societies define adequate pensions?Concept ofadequacy• Lessons from EuropeBalancingadequacywithsustainability• How to close global coverage gap?Facing thecoveragechallenge
Adequacy of pensions• How societies define adequate pensions?Concept ofadequacy
Questions to be asked and answered todetermine what pension provisions areadequateWhat isretirement?What societyshouldguarantee?Social contract:What pension systemcountry should have?
Changing perceptions what is adequate maylead to changes in explicit and implicitsocial contracts• Happens only when person is not able to workanymore?• Is a well deserved period of rest after workinglife?Definition andtiming ofretirement• Guarantee aims only at alleviating poverty forthose unable to support themselves?• Guarantees every resident a minimum income atold-age?• Guarantees also certain proportion of pre-retirement income (replacement rates)?Level ofsocietalguarantees• People should save for themselves• Those unable to contribute/save should besupported• Younger should support old generationDegree ofsolidarity
Changing social contracts determine changesin financial and institutional solutionsSocial contract behindpensionsWhat is retirement?What is guaranteed bythe society?How much solidarity andredistribution towardsthe poorer?Financial andinstitutionalalternativesMandatory versusvoluntaryDefined benefit versusdefined contributionPAYG versus advancedfundingPublic versus privateprovision
Defining pension adequacy● Adequacy and sustainability are joint andinterlinked objectives of social policy● Adequacy is defined nationally as part of thebroader implicit or explicit social contract whichsets the design of the pension system● National social contracts cross the borders:● there are standards accepted internationally (like ILOConvention no 102 or Recommendation no 202)● European Union Open Method of Coordination: Adequateold-age pension systems should prevent poverty in the oldage but also provide income replacement after retirementpreventing sharp decline in living standards
Lessons from Europe• Focus on sustainability but what aboutadequacy?Recentreforms ofEuropeanpensions tofacedemographicchallenge
In many European countries already introduced pension reformsmay successfully counterbalance financial impact ofdemographic change (Projected change of public pension expenditure dueto different factors in GDP percentage points between 2010 and 2060)-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30LVPLEEITDKPTFRSEELBGUKEU27EA17ATDECZHUFILTNLESROIENOSKMTBESICYLUDemographic dependency Benefit reductions Other changes
In some countries public pension expenditure areeven projected to decrease and average projectedincrease in most countries is far from dramatic-5 0 5 10 15 20LatviaPolandEstoniaItalyDenmarkPortugalFranceSwedenGreeceBulgariaUKEU27AustriaGermanyCzechRepublicHungaryFinlandLithuaniaSpainNetherlandsRomaniaIrelandNorwaySlovakiaMaltaBelgiumSloveniaCyprusLuxembourgPercentage pointsResulting changeBenefit reducedOther reforms
However in many countries reforms will significantlyaffect future benefit levels...Replacement rate in public pension schemes 2010 and 2060ItalyLuxembourgSpainGreeceFranceMaltaPortugalFinlandSlovakiaBulgariaPolandNorwayLatviaEU27AustriaCyprusRomaniaGermanyHungaryLithuaniaIrelandEstonia152025303540455055606570758015 20 25 30 35 40 45 50 55 60 65 70 75 80Replacementrateatretirementin2060Replacement rate at retirement in 2010Czech Republic
Even 40% replacement rate however does notprevent poverty for those with low earnings0102030405060708090100BulgariaCzechRepublicEstoniaSlovakiaLuxembourgLatviaSpainLithuaniaHungarySloveniaMaltaPortugalFranceRomaniaCroatiaUnitedKingdomNetherlandsBelgiumPolandGreeceIreland40%ofminimumwageaspercentageofrelativepovertylineC102 benchmarks40% of minimum wage as percentageof relativepoverty line, 2010(poverty line thresholds at 40% and 60% of median income) 40% median income poverty threshold60% median income poverty threshold
Nearly all EU member countries ratified:● either ILO Convention no 102 (C.102) onminimum standards in social security or● European Code of Social Security (ECSS) ofthe Council of Europe,● and some ratified in addition also ILOConvention no 128 on Invalidity, Old-ageand Survivors benefits (C.128).
Future replacement rates from contributorypensions will be significantly reduced● Reforms implemented or being implemented acrossEurope are significantly reducing replacement ratesprovided through the contributory, earnings relatedparts of the national pension systems● Replacement rates after 30 years in many countrieswill be lower than 40 per cent required byinternational standards● Many of those with shorter or broken careers and lowincomes will not be eligible to pensions fromcontributory parts of the pension system high enoughto prevent them from falling into poverty in the old-age
Protection of those with broken careers andlower life-time incomes weakened by reforms● Many new reformed pension schemes are not justtranslating differentiation of earnings at the labour marketinto differentiation of pensions: these differences mayactually be amplified● Reforms often removed from benefit formulas redistributivecomponents aimed to protect against poverty those withlower earnings and shorter careers● For a time being this changes has not yet been everywhereadequately compensated by increased role of various non-contributory provisions like basic minimum pensions orsubsidies to contributions of those caring for children or sickand elderly, unemployed, persons with disabilities etc.
How to prevent from poverty those with lowerincomes and those having no possibility to havelong unbroken careers?● Either one should preserve or restore in one way oranother the redistributive defined benefit formulas infirst pillars, or● Secure that in the overall pension system there aremuch stronger than before non-contributory incomeguarantees (like basic state pension, universal ormeans-tested) as well as contribution subsidiescompensating adequately some non-contributoryperiods● To secure sustainability, conditions have to be createdto effectively extend duration of working lives anddelay retirements
Automatic mechanisms will not replace goodpolicy making in social dialogue● Many reforms introduce various automatic mechanisms toensure long-run financial sustainability of pensions● There are no similar mechanisms to guarantee adequacy...● ...other than good policy making through well informedsocial dialogue based on agreed adequacy targets,balancing shorter and longer term needs as well as benefitadequacy with financial sustainability
Closing the coverage gap• How to close global coverage gap?Facing thecoveragechallenge
Demographic ageing will worsenthe global coverage gap1. Now already 61% of the worlds’ elderly live in lessdeveloped regions with lowest pension coverage2. This percentage will increase to 83% in 21003. More than half of these not covered elderly are – andwill be - in Asia4. now has only 5% of older than 65 live in Africa, it willbe more than 20% in 21005. There is more women than men among those notcovered6. Now 35% of older than 65 live in Europe and NorthAmerica, in 2100 it will be only 15%
Greatest challenge in the ageingworld: coverage gap• Only minority of the world’s working populationcontributes to any pension scheme (30%)• Only small minority of the world’s older persons receivesany pension (20% in low-income countries)Provide at least basic income security to uncoveredmajority of the elderly is a priorityRecommendation no 202 (2012) concerning nationalfloors of social protection
Role of non-contributory pensions in closingcoverage gaps1. Low-income countries with very low coverage (i.e. Africa and Asia):non-contributory pension the only way to provide at least basicincome security for majority of the elderly. Attractive option to beselected as one of the first step to gradually build comprehensivesocial security system2. Countries with significant coverage gap mainly concerning poor self-employed (like Chile etc.): the way not only to close effectivelycoverage gap but also to strengthen minimum guarantees within thewhole pension system3. Countries with coverage high now but which introduced reformsaiming at having “actuarially fair” pensions: as the coverage interms of number of people entitled to reasonably adequatepensions will be falling, the role of non-contributory pensions willbe growing in all respects: filling the emerging coverage gap,guaranteeing minimum incomes and taking over redistributionalfunctions eliminated from contributory part of the system
Policy choices and parameters:1. Entitlement conditions: universal pension for everybody overcertain age more equitable, simpler and cheaperadministratively then solutions with additional entitlementcriteria or “tests”2. Age: should be coordinated with age in the contributoryprogrammes, in the longer run can be easily linked to lifeexpectancy or demographic structure, in some low incomecountries however may be chosen at a higher level for costconsiderations and then gradually reduced.3. Benefit level: chosen depending on the structure andprovisions of the overall pension system in the country andminimum income guarantee levels targeted by social policy4. Affordable everywhere if policy space available
Adequate and sustainable pensions part ofwider national social protection floors:access to a set ofgoods and servicesconstitutingessential healthcare includingmaternity carebasic incomesecurity forchildrenbasic incomesecurity forpersons in activeage unable to earnsufficient incomebasic incomesecurity forpersons in oldageThe social protection floors should comprise at least the followingbasic social security guaranteesnational definition of minimum levelsGuarantees should be provided to at least all residents and children, as definedin national laws and regulations, subject to Members’ existing internationalobligations