PROST Application in BulgariaMiglena Abels
Outline• Demographic and Economic Context• Pension System Design• Pillar I Main Performance Indicators• PROST Assumptions•...
Environment• Demographics▫ Rapidly ageing society: old age dependency rate of 25%, projectedto double by 2050▫ Low fertili...
Pension system designPillar 0Non-contributorysocial pensionState BudgetFinancedUniversalPillar IDefined BenefitEarnings-Re...
Reformed public system design• Contributory Programs: old age, disability, survivorship, work injury• Contribution Rate▫ N...
Pillar I Main performanceindicators• Coverage rate: 55% of the working agepopulation• System dependency rate: 75%• Average...
PROST AssumptionsDemographic, macroeconomic, coverage, laborforce participation, retirement behavior• Labor force particip...
PROST Assumptions – example tablesGender/Age 2011 2015 2030 2035 2040 2045 2055 2065 2075MaleLife Expectancy: AtBirth 68.8...
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Demographic trends and implications65 15 3518152229364350576471788592992011femalefemale65 15 35181522293643505764717885929...
Demographic trends and implications(2)• PROST helps us see what the retirement age should be if we want tomaintain the sam...
Projected Dependency Rates0%20%40%60%80%100%120%20122014201620182020202220242026202820302032203420362038204020422044204620...
Projected average replacement ratefor a new old age pensioner130%5%10%15%20%25%30%35%40%45%50%Avg RR male (new, non-switch...
Projected average replacement rate for anexisting old age pensionerFunded Pillar Replacement Rate: Assuming real interest ...
Projected replacement rates andadequacy• In Bulgaria, close to 40% of contributors insured athalf of average insured wage•...
Coverage of the working age population0%20%40%60%80%100%120%15 25 35 45 55 Contributor Agemale contributors female contrib...
Coverage of the working agepopulation (2)• Low coverage today will translate into a growing number of elderlywithout pensi...
Projected annual current balance, %GDP (2)Graph on the leftshows theprojected deficitwith and withoutthe estimatedaddition...
Projected implicit PAYG pension debt,% GDP50.0%100.0%150.0%200.0%250.0%Total Implicit Pension Debt as % of GDP19Discount r...
Summary of key findings• System dependency rates projected to increasefurther, resulting in additional fiscal pressures• C...
21
An increase to the contribution rate22-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%An increase of 6% improves the fiscal statePAYG Bal...
Higher fertility rates020406080100120Dependency RatesRet. Age + / Age 15-Ret. Age (fertility)System Dependency Rate (ferti...
Equalization of retirement agesbetween men and women at 65Projected fiscal savings (2024-2050) of about 0.3 percent of GDP...
Conclusions and policy recommendationsSummary of projection results• An increase of the contribution rate of 6% improves t...
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Pensions Core Course 2013: PROST Application in Bulgaria

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Pensions Core Course 2013: PROST Application in Bulgaria

  1. 1. PROST Application in BulgariaMiglena Abels
  2. 2. Outline• Demographic and Economic Context• Pension System Design• Pillar I Main Performance Indicators• PROST Assumptions• Impact of current reforms▫ Demographic trends and implications (dependency rates)▫ Projected replacement rates▫ Projected coverage of the elderly▫ Projected fiscal performance of the public system• Policy options (alternative scenarios)▫ Increase to contribution rates▫ Equalization of retirement ages between men and women▫ Higher fertility rate2
  3. 3. Environment• Demographics▫ Rapidly ageing society: old age dependency rate of 25%, projectedto double by 2050▫ Low fertility rate: 1.48 children per woman (well belowreplacement level)▫ Life expectancy at birth: 69m/73f▫ Life expectancy at official retirement age: 14.4/18.4 (63.8/60.8)• Economy▫ Relatively low GDP growth rates (about 1.7% real)▫ Moderate inflation (about 3.5%)▫ High labor force participation at prime working ages for both menand women. Low labor force participation among youth and olderworkers above the age of 553
  4. 4. Pension system designPillar 0Non-contributorysocial pensionState BudgetFinancedUniversalPillar IDefined BenefitEarnings-RelatedPay-as-you-go(PAYG)Mandated(employed, self-employed,farmers)Pillar IIDefinedContributionEarnings-RelatedFully FundedMandated forindividuals bornafter 1959Pillar IIIDefinedContributionEarnings-RelatedFully FundedVoluntary4
  5. 5. Reformed public system design• Contributory Programs: old age, disability, survivorship, work injury• Contribution Rate▫ Non-switchers: 17.8% to Pillar I▫ Switchers: 12.8% (Pillar I) and 5% (Pillar II) – increasing to 7%▫ Government: 12% of insured income• Eligibility conditions for an old age pension (legislated reform)▫ Age: 65m/63f▫ Service: 40m/37f years▫ No early retirement under normal labor category• Eligibility conditions for a minimum contributory pension▫ Age 67 with 15 years of contributions▫ Amount set at around 20% of average insured wage• Old age pension amount dependent on:▫ accrual rate (1.2% and 4% for deferred pension)▫ lifetime wages• 100% wage valorization and pension indexation to inflation5
  6. 6. Pillar I Main performanceindicators• Coverage rate: 55% of the working agepopulation• System dependency rate: 75%• Average pension: 47% of average wage• Total pension expenditure: 9.4% of GDP▫ Public system in deficit▫ The government became a “third insurer” in 2009contributing at 12% of covered wage bill.▫ Employee/employer contributions finance onlyabout half of pension expenditures6
  7. 7. PROST AssumptionsDemographic, macroeconomic, coverage, laborforce participation, retirement behavior• Labor force participation rate constant at baseyear level• No assumptions related to coverage expansion• Preserving the same retirement pattern inmodeling the increase in the retirement age• Assuming all legislated reforms are implementedaccording to the law7
  8. 8. PROST Assumptions – example tablesGender/Age 2011 2015 2030 2035 2040 2045 2055 2065 2075MaleLife Expectancy: AtBirth 68.8 70.0 72.7 73.2 73.8 74.3 75.4 76.6 77.8At Age 20 52.3 53.0 54.7 55.1 55.4 55.8 56.7 57.5 58.5At Age 60 17.0 17.5 18.6 18.9 19.2 19.5 20.1 20.8 21.5At Age 65 13.6 14.0 15.0 15.2 15.5 15.7 16.3 16.9 17.6FemaleLife Expectancy: AtBirth 72.5 74.0 77.3 78.1 78.8 79.5 80.9 82.5 84.1At Age 20 55.1 56.2 58.8 59.4 60.0 60.6 61.8 63.1 64.6At Age 60 18.9 19.6 21.4 21.9 22.4 22.8 23.8 24.9 26.1At Age 65 15.1 15.7 17.3 17.8 18.2 18.6 19.5 20.5 21.68MacroeconomicTrends 2013 2014 2015 2016 2017 2018 2019 2020 2040 2050 2055 2065 2075Real GDP Growth 1.9% 3.1% 3.7% 4.0% 4.0% 3.7% 3.5% 3.2% 1.1% 0.7% 0.8% 0.4% 0.4%Real Wage Growth 2.0% 2.4% 2.8% 3.4% 3.1% 3.0% 2.9% 2.9% 2.3% 1.6% 1.5% 1.5% 1.5%Inflation Rate3.4%2.4%2.6% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
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  10. 10. Demographic trends and implications65 15 3518152229364350576471788592992011femalefemale65 15 3518152229364350576471788592992053 femalemale male10PROST Population Pyramid
  11. 11. Demographic trends and implications(2)• PROST helps us see what the retirement age should be if we want tomaintain the same duration of retirement in the future• Recent reforms to the retirement age (63m/60f  65m/63f) will beoffset by gains in life expectancy, calling for further increasesbeyond 65112013 2075Age at which lifeexpectancy atretirement in 2075 sameas in 2013Ret. AgeLE at Ret.Age Ret. AgeLE at Ret.Agemale 63.8 14.4 65 17.6 70female 60.8 18.4 63 23.4 69
  12. 12. Projected Dependency Rates0%20%40%60%80%100%120%20122014201620182020202220242026202820302032203420362038204020422044204620482050205220542056205820602062206420662068207020722074Old Age Dependency Rate Population Dependency RateSystem Dependency Rate (total beneficiaries)System dependency rate around100%:1 beneficiary: 1 contributor12.8% PAYG contribution ratecould only afford to pay 12%PAYG replacement rate12
  13. 13. Projected average replacement ratefor a new old age pensioner130%5%10%15%20%25%30%35%40%45%50%Avg RR male (new, non-switcher) Avg RR female (new, non-switcher)Avg RR male (new, switcher) Pillar I and II Avg RR female (new, switcher) Pillar I and IIlast cohort retiring with fullpension in 2023m/2021w.After that minimum pensionprovided at age 67First cohort of switchers start to receivepensions from Pillar II in 2023w/2025mPillar II introduced in 2002(mandatory for those bornafter 12.1.1959)- firstcohort to retire from PillarII was 42 in 2002
  14. 14. Projected average replacement rate for anexisting old age pensionerFunded Pillar Replacement Rate: Assuming real interest earned on individualaccount is 3 percent annually. Investment risk is fully borne by the individual140%10%20%30%40%50%60%Avg PAYG RR Avg RR (Pillar I and Pillar II)Minimum pension with 15years of service = 20% ofaverage insured wage
  15. 15. Projected replacement rates andadequacy• In Bulgaria, close to 40% of contributors insured athalf of average insured wage• Another 20% insured at the minimum wage• Even with full careers, many people will receive apension that is close to the value of the minimumcontributory pension▫ This could further damage contribution compliance –“why contribute past 15 years if the additional increasefor contributing 37/40 is not that significant”▫ It also raises concerns about the adequacy of thepension benefit for lower income earners15
  16. 16. Coverage of the working age population0%20%40%60%80%100%120%15 25 35 45 55 Contributor Agemale contributors female contributorsmale beneficiaries added female beneficiaries addedHigh rates of youthunemployment16Low densityRoughly 55% of WApopulation contributed in2011Movementbetween formaland informalemployment
  17. 17. Coverage of the working agepopulation (2)• Low coverage today will translate into a growing number of elderlywithout pension rights in the future• The current almost universal coverage among the elderly (due to fullemployment during the Soviet era) will not continue going forward17Adjusted pensioners as a percent of thepopulation age/gender 2012 2050 2075full pension female (age 63) 74 54 51full pension male (age 65) 92 53 49minimum contributory pension female (age 67) 21 22 19minimum contributory pension male (age 67) 3 21 18
  18. 18. Projected annual current balance, %GDP (2)Graph on the leftshows theprojected deficitwith and withoutthe estimatedadditional costof financingsocial pensionsfor peoplewithout rights tothe pensionsystem18-7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%20122014201620182020202220242026202820302032203420362038204020422044204620482050205220542056205820602062206420662068207020722074Projected PAYG Deficit, % GDPPAYG Balance, %GDP accounting for government contribution (baseline)PAYG Balance, %GDP without government contribution (baseline)Accounting for additional cost for people without pension rights with gov. contributionAccounting for additional cost for people without pension rights without gov. contribution
  19. 19. Projected implicit PAYG pension debt,% GDP50.0%100.0%150.0%200.0%250.0%Total Implicit Pension Debt as % of GDP19Discount rate: 3%Method: Accrued to date liabilities
  20. 20. Summary of key findings• System dependency rates projected to increasefurther, resulting in additional fiscal pressures• Coverage among the elderly projected to contractAdditional fiscal pressure arising from the need toprovide non-contributory pension to those withoutrights to a pension (about 30% of future elderly)• Large government role in financing socialinsurance will lead to a highly inequitable systemUsing general revenue financing to subsidize aselect group of people (most likely the wealthierones anyways)• Little room to reduce the generosity of benefits• Space to increase retirement ages beyond 6520
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  22. 22. An increase to the contribution rate22-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%An increase of 6% improves the fiscal statePAYG Balance, %GDP accounting for government contribution +6% increase + costs for ineligible personsPAYG Balance, %GDP without government contribution and 6% increase to contribution rate + costs for ineligible persons
  23. 23. Higher fertility rates020406080100120Dependency RatesRet. Age + / Age 15-Ret. Age (fertility)System Dependency Rate (fertility)System Dependency Rate (baseline)Ret. Age + / Age 15-Ret. Age (basline)A higher fertility rate (2.2 from 1.5) does not yield an impact in time. Changes are only apparentstarting in 2050.This is due to smaller cohorts of women of reproductive age today due to a significant post-transition drop (early 1990s) in fertility rates and outmigration.23-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%2012201520182021202420272030203320362039204220452048205120542057206020632066206920722075PAYG Balance, % GDPPAYG Balance, %GDP accounting for government contribution(Fertility at replacement level)PAYG Balance, %GDP accounting for government contribution(baseline)
  24. 24. Equalization of retirement agesbetween men and women at 65Projected fiscal savings (2024-2050) of about 0.3 percent of GDP (accounting forroughly 20 percent of the system’s deficit)Why the savings are not even greater:Currently the actual difference ineffective retirement ages between menand women is smaller than the gap inofficial retirement agesWomen tend to work until later ages inorder to meet the length of servicerequirement (lower contributiondensity due to more career breaks,especially due to having children)On top of that, more men retire beforethe official pension age because mostlymen work under labor categories I andII (dangerous occupations, military,police, etc.) where retirement ages canbe lower24-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%2012201520182021202420272030203320362039204220452048205120542057206020632066206920722075PAYG Balance, % GDP: baseline vs. reformPAYG Balance, %GDP (equal) PAYG Balance, %GDP (baseline)Equalizationcomplete by 2024
  25. 25. Conclusions and policy recommendationsSummary of projection results• An increase of the contribution rate of 6% improves the fiscal state of thepublic system• A higher fertility rate improves the fiscal state but not in time to combat theworst of the demographic crisis• Equalizing retirement ages:▫ yields fiscal savings▫ yields a slightly higher replacement rate for women▫ could lead to positive labor market effects since LFP among people 55+ isquite lowPolicy recommendations• Increase contribution rate (consider potential negative labor market effects)• Equalize retirement ages to 65 and consider a further increase• Explore and alternative financing mechanism in order to avoid regressive anddistortive outcomes in the future due to low coverage today▫ For example: introducing a universal, non-contributory old age benefit toall individuals of age and a smaller earnings related pension that closelyreflects lifetime contributions25
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