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Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia
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Pensions Core Course 2013: The Inverted Pyramid - Pension Systems in Europe and Central Asia

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  • 1. THE INVERTED PYRAMID: PENSIONSYSTEMS IN EUROPE AND CENTRAL ASIA FACINGDEMOGRAPHIC CHALLENGESTeam led by Anita Schwarz and Omar AriasDecember 20121
  • 2. IMPORTANT EUROPEAN ACHIEVEMENT OFPROVIDING OLD AGE SECURITY Over last century, increasing number of workersinsured against risks of old age, disability, andloss of a breadwinner Insured workers and their employers paid apercentage of wage as contribution When each new group of workers joins,contribution revenue goes up, but initially sinceno one from the new group is eligible for benefits,no additional expenditures occur Over time as the workers who have paid becomeeligible for benefits, expenditures increase2
  • 3. MATURATION OF PENSION SCHEMESTHROUGHOUT EUROPEEstablished around 1900s > Industrial workersCommerce, civil servants,salaried employeesSince 1930s >Farmers, domestic workers,self-employedSince 1950s - >Baby boomersSince 1970s - >Increased female LFP rateSince 1960s (earlier in ECA)Since 1990s in ECA - >Since 2010s - >Drop in total and formal LFP ratePost-1990s babies enter LMMaturity expected in 1960Extended to 1990Extended to 2000Extended to 2010Extended to 2020No Extension,Added stress 1990-2030No Extension,Added stress 2010-20503
  • 4. LABOR FORCE GREW IN LAST CENTURY40.250.450.650.851.051.251.451.651.852.052.251901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011Labor Force Growth (source: Peter Flora, ILO)AustriaBelgiumBulgariaDenmarkFinlandFranceHungaryItalyNetherlandsNorwayPolandPortugalRomaniaSpainSwedenSwitzerlandUK
  • 5. COVERAGE OF THE LABOR FORCE GREW ASWELL0.20.40.60.811.21.41900 1910 1920 1930 1940 1950 1960 1970percent Pension Insurance Coverage, % Labor ForceAustria Belgium Denmark FinlandFrance Germany Ireland ItalyNetherlands Average Linear (Average) 5
  • 6. HIGHER CONTRIBUTION RATES LED TOFURTHER INCREASES IN REVENUE02040601940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012Contribution rates inNorthern EuropeSweden Netherlands FinlandNorway Iceland IrelandUK Germany Switzerland01020304050601940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012Contribution rates inSouthern EuropeFrance Italy SpainPortugal Slovenia Greece01020304050601940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012Contribution rates in Central Europe andBalkans BulgariaPolandCroatiaEstoniaLatviaLithuaniaHungary6
  • 7. POLICY CHOICES WHEN FLUSH WITHCONTRIBUTION REVENUES5658606264666870721970 1975 1980 1985 1990 1995 2000 2005 2010Male Average EffectiveRetirement AgeAustria BelgiumDenmark FranceGermany ItalyNetherlands SpainSweden United Kingdom54565860626466687072741970 1975 1980 1985 1990 1995 2000 2005 2010Female Average EffectiveRetirement AgeAustria BelgiumDenmark FranceGermany ItalyNetherlands SpainSweden United Kingdom7
  • 8. DURATION OF RETIREMENT INCREASED FROMINCREASING LIFE EXPECTANCY AND FALLINGEFFECTIVE RETIREMENT AGE051015202530Belgium Spain SwedenExpectedYearsinRetirement197019902009635759646365Average Effective Retirement Age Shown on Each Bar716763Data Sources: OECD, Eurostat8
  • 9. AND PENSION SPENDING GREW0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%Pension Spending, % GDPAustria Belgium Denmark Finland FranceGermany Ireland Italy Netherlands NorwaySweden Switzerland United Kingdom Greece TurkeySource: OECD, Flora9
  • 10. POVERTY RATES FOR PENSIONERS LARGELY FELLRESULTING IN LOWER POVERTY RATES FOR THEELDERLY COMPARED TO THE GENERAL POPULATION10-5-4-3-2-1012345Gap in 1987*Gap in 2004*
  • 11. NOW EUROPE IS AGING110%5%10%15%20%25%30%35%IrelandIcelandNorwayUnitedKingdomDenmarkNetherlandsSwedenFinlandAustriaSwitzerlandGermanyCyprusFranceBelgiumSloveniaGreeceSpainPortugalItalySlovakiaLithuaniaPolandEstoniaHungaryCzechRepublicRomaniaLatviaCroatiaBulgariaAlbaniaMontenegroTFYRMacedoniaSerbiaBosnia&HerzegovinaArmeniaRepublicofMoldovaRussianFederationBelarusUkraineGeorgiaTajikistanKyrgyzstanTurkmenistanUzbekistanKazakhstanAzerbaijanTurkeyNorthern Europe Southern Europe Central Europe Balkans "Old" countriesof FSUYoung countries%ofpopulationovertheageof652010 2050
  • 12. BUT MORE TROUBLING IS THE PROJECTEDDECLINE IN WORKING AGE POPULATION-50.0%0.0%50.0%100.0%150.0%200.0%GermanySwitzerlandAustriaNetherlandsFinlandDenmarkSwedenUnitedKingdomNorwayIrelandIcelandPortugalSloveniaItalyGreeceSpainBelgiumFranceCyprusBulgariaRomaniaLatviaPolandLithuaniaCroatiaSlovakiaHungaryEstoniaCzechRepublicBosniaandHerzegovinaTFYRMacedoniaSerbiaAlbaniaMontenegroGeorgiaRepublicofMoldovaUkraineBelarusRussianFederationArmeniaAzerbaijanTurkeyKazakhstanUzbekistanTurkmenistanKyrgyzstanTajikistanNorthern EU Southern EU Central EU Balkans(non-EU)Old Countriesof FSUYoungCountries1970-20102010-205012
  • 13. SOCIAL INSURANCE MODEL WHICH PROVIDEDGENEROUS BENEFITS FOR SO LONG CAN NOLONGER DO SOContributorsPensionersGenerous BenefitsContributors PensionersNot So Generous Benefits13
  • 14. LEADS TO FISCAL DEFICITS IN PENSIONSYSTEMS FAR GREATER THAN DURINGRECENT FINANCIAL CRISIS-7%-6%-5%-4%-3%-2%-1%%2007 2017 2027 2037 2047 2057 2067%ofGDPProjected Pension System Deficits in AverageCE Country14
  • 15. FACED WITH THE DEMOGRAPHIC ONSLAUGHT,EUROPE HAS UNDERTAKEN LOTS OF PENSIONREFORM0%20%40%60%80%100%120%NorthernEuropeSouthernEuropeCentralEuropeBalkans(non-EU)"Old"countries ofFSUYoungcountriespercentofcountriesineachsub-regionParametric Pension Reforms 1995-2010Increase in Contribution RateIndexation ReformsExtension of Averaging PeriodYears of Service ReformsDecrease in Contribution RateIncrease in Retirement AgeChanges to Benefit rate15
  • 16. ADOPTED A SMORGASBORD OF STRUCTURALREFORMSPoint System NotionalAccountsFundedDefinedContributionUniversalPensionGermanyFrance (pvt sector)RomaniaSlovak RepublicEstoniaBosnia, RSCroatiaMontenegroSerbiaSwedenItalyLatviaPolandAzerbaijanKyrgyz RepRussian FedTurkmenistanSwedenDenmarkPolandHungarySlovak RepLithuaniaLatviaEstoniaBulgariaRomaniaCroatiaFYR MacedoniaKazakhstanKosovoKyrgyz RepRussian FedIrelandUKNetherlandsDenmarkCzech RepublicGeorgiaKazakhstanKosovo16
  • 17. IMPACT OF REFORMS - RETIREMENT AGES WENT UP,BUT SO DID LIFE EXPECTANCY – DURATION OFRETIREMENT DID NOT CHANGE MUCH17-4-202468IcelandAustriaNetherlandsSwedenGermanyFinlandIrelandUnitedKingdomSwitzerlandDenmarkNorwayBelgiumSloveniaSpainFrancePortugalGreeceCyprusItalyBulgariaRomaniaLithuaniaPolandSlovakiaCzechRepublicLatviaHungaryEstoniaCroatiaNorthern Europe Southern Europe Central EuropeYearsChange in Duration of Retirement from 2001-2009Source: Eurostatchange in effective retirement age change in life expectancy at effective retirement age
  • 18. NO EFFECTIVE DECLINE IN GENEROSITY(2001-2008)-40.0%-20.0%0.0%20.0%40.0%60.0%80.0%GermanyAustriaNetherlandsSwitzerlandFinlandUnitedKingdomDenmarkNorwaySwedenIcelandIrelandSloveniaItalyGreeceSpainBelgiumFranceCyprusPortugalLatviaPolandLithuaniaSlovakRepublicCzechRepublicEstoniaRomaniaHungaryNorthern Europe Southern Europe Central Europepercentchangebetween2001and2008Changes in Generosity Levels (01-08): Growth inPension Spending as % of GDP relative to growth inshare of elderly population18
  • 19. GROWTH IN PENSION SPENDING PER ELDERLYPERSON RELATIVE TO GROWTH IN GDP PERCAPITA, 2001-0919-60%-40%-20%0%20%40%60%80%100%GermanyAustriaNetherlandsSwitzerlandFinlandUnitedKingdomDenmarkNorwaySwedenIcelandIrelandSloveniaItalySpainGreeceBelgiumFranceCyprusPortugalLatviaCroatiaPolandBulgariaLithuaniaSlovakiaCzechRepublicEstoniaRomaniaHungaryMontenegroMacedoniaAlbaniaSerbiaBelarusRussiaArmeniaMoldovaKazakhstanTurkeyKyrgyzstanAzerbaijanTajikistanNorthern Europe Southern Europe Central Europe Balkans "Old" FSU "Young"
  • 20. ARE EASY SOLUTIONS POSSIBLE? Increase the working age population Fertility increases No evidence that policy measures work Even if they did, the impact of increased fertility wouldcome too late Immigration Governments need to consider revamping immigrationpolicies Both of these extend the pyramid Eventually the additional children will get old andneed benefits as will the immigrants Only long-term solution if fertility continues to growand immigrants continuously flow in 20
  • 21. INCREASE LABOR FORCE PARTICIPATION – NOTMUCH ROOM IN PRIME WORKING AGES210.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%100.0%IrelandUnitedKingdomNetherlandsGermanyNorwayAustriaIcelandFinlandDenmarkSwitzerlandSwedenItalySpainGreeceCyprusBelgiumPortugalFranceSloveniaRomaniaCroatiaHungaryPolandLithuaniaBulgariaLatviaEstoniaSlovakiaCzechRepublicMacedonia,TFYRSerbiaGeorgiaUkraineMoldova,RepublicofRussianFederationTurkeyKyrgyzstanKazakhstanNorthern Europe Southern Europe Central Europe BK OC YCLabor Fore Participation Rates for the 40-44 agecohorttotal male female
  • 22. INCREASE COVERAGE THROUGHFORMALIZATION OF THE LABOR FORCE Countries commonly blame informality of labormarkets Brought the problem forward, but not the root cause Increased formality helps in short run, but makeslong run deficit worse Shown in results from CGE model If the system is unaffordably generous, adding moreworkers adds revenue today, but makes the long termdeficits worse Only improves long run if the government cheatsworkers, giving them low rates of return oncontribution Hard to induce workers out of informality if thegovernment is cheating workers 22
  • 23. INCREASE PRODUCTIVITY Limited impact if labor becomes more productiveand results in higher wages Higher wages result in higher contributions Benefits after retirement typically not indexed fullyto wage growth, providing some gains Might be possible to tax growth from technicalchange that is not reflected in wage growth23
  • 24. ROOM FOR USING OTHER FISCALRESOURCES IS LIMITED Consumption taxes are the mainsource of tax revenue in mostcountries On average VAT accounts for about 45percent of government revenue Standard VAT rates between 18 and 27percent Some room for base broadening andimproved administration Corporate and Personal income taxesvary in importance On average income taxes account for 20percent of government revenue Substantial variation in rates, base andyield Payroll Contributions also vary On average social contributions account for25 percent of government revenue Other taxes Estate Taxes Property Taxes Other fiscal costs will also rise withaging Need to leave room for saving0 10 20 30 40AzerbaijanArmeniaTajikistanKosovoKyrgiz RepublicKazahkstanAlbaniaRussiaTurkeyGeorgiaMacedoniaLithuaniaRomaniaEstoniaLatviaSlovakiaBulgariaMoldovaPolandCroatiaUkraineCzech RepublicMontenegroBosnia & HerzegovinaSerbiaSloveniaBelarusHungaryPercent of GDPIncome TaxesTaxes onGoods andServicesOther TaxesSocialSecurityContributions24
  • 25. LEFT WITH HARDER SOLUTIONS People will need to work longer Benefits might need to be reduced People will need to save more People need to understand these choices25
  • 26. POTENTIAL FOR “ACTIVE AGING” IS HUGE INECA REGION0%5%10%15%20%25%30%35%GeorgiaKazakhstanSwedenKyrgyzstanIrelandEstoniaUnitedKingdomLatviaAzerbaijanGermanyLithuaniaFinlandDenmarkMoldovaPortugalNetherlandsSpainBulgariaRussianFederationCzechRepublicAustriaSlovakiaUkraineLuxembourgRomaniaGreeceFranceItalySerbiaCroatiaBelgiumSloveniaHungaryTurkeyPolandPotential to increase Labor Force among 45-64year olds45-49 50-54 55-59 60-64Data Source: ILO 26
  • 27. RETIREMENT AGES WOULD HAVE TO RISESIGNIFICANTLY EVEN TO MAINTAIN 1970DURATION OF RETIREMENT27051015202530Belgium Spain SwedenExpectedYearsinRetirement1970199020092009 adj7271676474716563 63 635759Average Effective Retirement Age Shown on Each Bar
  • 28. WORKING LONGER Policies to encourage active aging Opportunities for effective skills upgrading throughoutworking-life Adapting workplace to enable productive employment ofolder workers Removing barriers and disincentives to work whilereceiving a pension or to work part-time Facilitating labor mobility May be trade-offs between actively recruitingimmigrants and having current workers work longer Will need to recognize and provide for those who areunable to work longer Tying retirement ages to life expectancy may not beenough Only corrects for longevity increases, not working agepopulation declining 28
  • 29. MAY NEED TO CONSIDER REDUCINGBENEFITS Will countries be able to afford much more thanprevention of old age poverty? If not, should we even bother with incomedifferentiated pensions? Should we continue to distinguish betweencontributory and noncontributory pensions? Need for less drastic changes if we can start now But there will be limits to benefit reduction giventhe need to maintain adequate benefits At the minimum, bring the elderly up to the povertyline29
  • 30. SAVINGS BECOME CRITICAL FORMAINTAINING BENEFIT ADEQUACY Voluntary savings programs have not beensuccessful Building up public reserves dedicated to agingnot even successful during boom years Mandatory savings (second pillars) experiencedproblems related to industrial organization of thepension fund industry Could not withstand fiscal pressures in the PAYGsystem Opt-out models for voluntary savings may bemore successful Additional contributions by employees forsavings may result in more robust systems 30
  • 31. POLICIES TO ENCOURAGE SAVINGS Centralizing business areas with scale economies Creating competition in the portfolio managementindustry Designing portfolio benchmarks for pension funds inthe form of lifecycle strategies Designing payout structures that insure proper riskallocation of investments, inflation, and longevityrisks Considering the introduction of guarantees on thevalue of the contributions, if necessary, to makeviable some rational risk taking by pension fundmanagers Designing sustainable models for the payout phase31
  • 32. POLITICAL ECONOMY People still believe that benefits can become more generous “Stealth” reforms – introducing automatic changes without explainingthem to people don’t work As soon as they start to have impact, people clamor for reversals Social contract has to be renegotiated May not be fair to preserve pensions for baby boomers whilepunishing later generations32

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