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PensionIndicatorsReliable statistics to improvepension policy-makingWorld Bank core course on pension reformWashington, D.C., April 2013
The need for reliable andup-to-date data Valuable lessons to be learned from other countries More countries address pressures of population ageing andmaturing of pension systems Rapid change and widespread pension reform Need for timely information about increasingly diverseretirement-income provision Move away from narrow focus on financial sustainability Greater emphasis on a ‘results–based’ policy-making Impact of policy changes needs to be identified, measuredand assessed2
Data sources3 Primary sources: national administrative: published or databases household surveys labour-force surveys Secondary sources: international organisations World Bank OECD (Organisation for Economic Co-operation and Development) Regional development banks ILO (International Labour Office/Organisation) United Nations ISSA (International Social Security Organisation)
Database:Constraints and challenges4 Capacity and resources on the national level Co-ordination between national agencies Missing or wrong information of individual records Corruption, evasion and abuse of systems Comparability in secondary sources Applicability of key concepts
Organising the indicators5EnvironmentSystemdesignPerfor-mance
Demographic, economic andsocial context7 Well known phenomenon of population ageing Lower fertility Longer life expectancy Patterns of labour-force participation by age Public finances: a constraint on pension-reform options Financial-sector development: a constraint on the directionof pension reform?
Demographic change:Life expectancy at birth9
Demographic change:Life expectancy at 60100510152025EAP High income: OECD ECA LAC MENA S. Africa S. Asia WorldLifeExpectancyat601995-2000 2000-2005 2005-2010
Demographic change:Population ageing, projections12-1020302010 2015 2020 2025 2030 2035 2040 2045 2050Sub-Saharan Africa South AsiaMiddle East & North Africa Latin America & CaribbeanHigh income: OECD Europe & Central AsiaEast Asia & Pacific
Economic context: labour-marketparticipation of over 65s130.0010.0020.0030.0040.0050.0060.00East Asia &PacificEurope &Central AsiaHighincome:OECDLatinAmerica &CaribbeanMiddle East& NorthAfricaSouth Asia Sub-SaharanAfrica1960198020002010Source: ILO
Other environment indicators14 Fiscal situation: a constraint on reform choices? budget deficit government debt Financial-market development to de developed using World Bank indicators Institutions to be developed using World Bank governance indicatorsKaufmann, D., A. Kraay, M. Mastruzzi (2009), ‘Governance Matters VIII: Aggregate andIndividual Governance Indicators, 1996-2008’, Policy Research Working Paper no. 4978,World Bank, Washington, D.C.Beck, T. and A. Demirgüç-Kunt (2009), ‘Financial Institutions and Markets across Countriesand over Time: Data and Analysis’, World Bank, Washington, D.C.
DesignIndicatorsStructure of the pension system,key parameters and rules
Overall structure:First and second pillars17 Zero pillar only: 5 countries (e.g., Botswana, Ireland,Namibia, New Zealand, South Africa) NDC: 10 countries (Azerbaijan, Egypt, Italy, Kyrgyz R.,Latvia, Mongolia, Norway, Poland, Russia, Sweden) Private DC: 32 countries (Latin America, EasternEurope/Central Asia, Australia, Denmark, Egypt, Ghana,Nigeria, Norway, Sweden) Public DC/provident funds: 25 countries (South Asia,Pacific, East Africa) DB schemes: 123 countries Points schemes: 10 countries (e.g., France, Germany,Senegal, Slovak R.)
Parameters: earnings measure18Lifetimeaverage earningsBest/finalearningsEast Asia/Pacific 3 3Eastern Europe/Central Asia5 1Latin America/Caribbean - 17Middle East/North Africa - 10South Asia - 2Sub-Saharan Africa - 18High-income OECD 16 3World 24 54
Parameters: earnings measure1905101520253035404550Pre-reform Post-reformIceland GermanyUnitedStatesCanadaHungaryJapan, Korea,Luxembourg,SwitzerlandNorway,United KingdomNumberof years of earningsin pension calculation05101520253035404550Pre-reform Post-reformNumber of years of earningsin pension calculationAustria,Finland ,Poland ,PortugalCzechRepublicFranceNetherlands ,Slovak RepublicGreece,Italy, TurkeySweden,Spain
Six principles and objectives24 Coverage of the pension system, by both mandatory andvoluntary schemes Adequacy of retirement benefits Financial sustainability and affordability of pensions totaxpayers and contributors Economic efficiency: minimising distortions on economicbehaviour, such as labour supply and saving Administrative efficiency: keeping costs low (collectingcontributions, paying benefits, managing investments) Security of benefits in the face of different risks anduncertainties
CoverageHow much of the labour force iscovered by the pension system?
Coverage26 Low coverage of formal pension systems may lead towidespread old-age poverty Retirement-income systems can affect people at all stagesof their adult lives (as contributors or beneficiaries) Focus here in people of working age Measuring coverage: affiliates or members? but risk of double-counting people in multiple schemes orwith multiple accounts/records also, dormant accounts/records of people no longer activelycontributing people registered for social security but not covered bypension component
Defining coverage:The active member concept27 Someone who contributed to or accrued rights in a formalpension scheme Concept clearest when pensions are contributory, but activemembers of non-contributory schemes are also ‘covered’ Also, people who receive credits for periods ofunemployment, caring for children, full-time education,military service etc. can be covered Note: active member concept only applies to mandatoryincome-replacement pensions (first and second pillars) andrarely to zero pillar schemes (universal basic, means-tested) Comparators: working-age population labour force
Coverage29Note: numbers in parentheses are observations in each region90%65%32% 34%44%13% 12%0%10%20%30%40%50%60%70%80%90%100%High-IncomeOECD (22)ECA (19) LAC (18) MENA (20) East Asia (5) South Asia (8) Sub-SaharanAfrica (11)Simpleaveragecoveragerate(activemembers/laborforce)
Coverage and national income301000 2500 5000 10000 25000 500000255075100Pension systemcoverage(% of labor force)National income perhead(US$,PPP exchange rates)
AdequacyPension entitlements,replacement rates and pensionwealth
Three approaches toassessing adequacy32 Empirical information on pension entitlements of recentretirees Evidence from household survey data on income andpoverty of older people Models of future pension entitlements of today’s workers
Modelling pension entitlements33 Uses ‘Apex’ model (Analysis of Pension Entitlements acrossCountries) Results published in OECD Pensions at a Glance andWorld Bank Pensions Panorama Baseline assumptions: worker entering the labour market today full career from age 20 to national, normal pensionable age standard assumptions of inflation, average-earnings growth,investment returns (for DC), discount rate country-specific information on mortality rates Important to note this is an indicator not a forecast
Retirement incentives:measurement41Defined benefit Defined contribution Points Notional accountsLonger working period Extra year’sentitlementExtra year’scontributionsExtra year’sentitlementExtra year’sentitlementExtra year towardsqualifying conditions— Extra year towardsqualifying conditionsExtra year towardsqualifying conditionsValorisation of earlieryears’ earningsInvestment returns onaccumulated balanceUprating of pension-point valueNotional interest onaccumulated notionalcapitalHigher earningsreplace earlier,perhaps lower,earnings in benefitformula— Higher earningsreplace earlier,perhaps lower,earnings in benefitformula—Shorter retirement duration Forgo a year’sbenefitsForgo a year’sbenefitsForgo a year’sbenefitsForgo a year’sbenefits“Actuarial” adjustment Lower annuity factor “Actuarial” adjustment Lower annuity factorDelay in claiming Probability of dying Probability of dying Probability of dying Probability of dyingDiscounting Discounting Discounting Discounting
Retirement incentives matter:Effect on behaviour42
AdministrativeefficiencyAssessing the cost of runningpublic pension systems
SecurityRisk and uncertainty inretirement-income systems