The document analyzes the pension system of the Republic of Cataliua and projects its financial sustainability under various reform scenarios. It finds that the current system is generous but financially unsustainable, with deficits reaching 10% of GDP in the long run. Five reform options are examined, including increasing contribution rates, decreasing accrual rates, increasing the averaging period, switching to price indexation, and raising the retirement age. All reforms help improve sustainability but raising the retirement age has the largest impact by lowering pension costs and the dependency rate.

1. Pension system
in the Republic of Cataliua
Tatyana Bogomolova
World Bank, HDNSP
April, 2013

2. 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

3. 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. 4
Projections:
No-Reform (Baseline) Scenario

5. 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

6. 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

7. 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

8. 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

9. 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 pensioners
9

10. 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 pensioners
10

11. 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 existing
11

12. -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 balance
12

13. 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

14. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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