CC t t iiCrossCross--country country experiencesexperiencesSession 3Session 3

Reform strategies: the experience of emerging European economies and their effects on sustainability

d iand equity

Per EckefeldtPer EckefeldtEuropean Commission

Directorate General for Economic and Financial AffairsIMF Fi l Aff i d E D t t f D i i

1

IMF Fiscal Affairs and European Departments conference: Designing fiscally sustainable and equitable pension systems in emerging

Europe in the post-crisis worldVienna, 18 March 2013

Population projections: Old-age dependency ratiosg p y

70

80Old-age dependency ratio (65+ / 15-64)

EU12: 21% to 62%EU: 26% to 52%

50

60

20

30

40

0

10

20

E K O K E U E R L FI Y 5 T 7 7 Z E T S R T T T SI U E G 2 K L O VIE U

KN

O DK BE LU SE FR N F CY

EU1 AT

EU2

EA1 CZ

EE MT

ES GR IT LT PT S HU DE

BG

EU1 S K P RO LV

2010 2010-2030 2030-2060

Progress with pension reforms: public spending(change 2010 2060 in percentage points) 2009 and 2012 AR(change 2010-2060 in percentage points) - 2009 and 2012 AR

0 014

0 016EU12: +1.2 pp. (2012)+2.6 pp. (2009)

0 010

0 012

0 014

+1.5 p.p. (2012 AR)

+2,3 p.p. (2009 AR)

+2.6 pp. (2009)

0 004

0 006

0 008

-0 002

0 000

0 002

LV PL EE IT DK PT FR SE EL BG U

12 UK

U27

U15 EA A

TD

E CZ HU FI LT NL ES RO IE N

O SK MT BE SI CY LU

-0 004

-0 002 EU EU EU

2009 AR 2012 AR

Decomposition of the increase in public pension expenditurep p pSignificant progress in Eastern European countries to put public pension systems on a more sustainable footing

12.012.0

14.0(%) of GDP)

public pension systems on a more sustainable footing

8.9

7.5

6.0

8.0

10.0

1.21.9 1.5

0.0

2.0

4.0

-4.4

-0.5

-4.6

-1.2

-2.6

-1.0

-2.7

-0.6

-2.4

-0.8-2.1

-0.6

-6.0

-4.0

-2.0

Dependency ratio Coverage ratio Employment effect Benefit ratio Interaction effect Total

EU12 EA17 EU15

Change in the benefit ratio(average pension over average wage)

10

20

-10

0

PL EE SK RO SE EL FR DE BG AT DK LU FI IT SI LT MT BE CZ CY

-40

-30

-20

P bli i

70

-60

-50

Public pensions

All pensions

-70

Pension policy challenges/reform options Pension policy challenges/reform options in the in the EUEUThe Commission set out its line in the 2012 Annual Growth 2012 Annual Growth Survey Survey on pension-related issues, confirmed in the 2013 2013 Annual Growth SurveyAnnual Growth Survey:• align the retirement age with increases in life expectancy (done already by IT,

ES, EL, DK, NL and SK);• restrict access to early retirement schemes and other early exit pathways;

l ki li• support longer working lives;• equalise the pensionable age between men and women; and,• support the development of complementary retirement savings to enhance

retirement incomesretirement incomes.

Long-term trend in pension policy towards mixed systems• 'Bismarck' towards 'Beveridge' and vice versa

Eastern European countries more prone to implementsystemic reforms

Adapting policies (1): the retirement agep g p ( ) gand life expectancy (men)

95 Statutory retirement age and life expectancy (in 2010 and 2060) - Men

2010 2060

85

90

Statutory retirement age and life expectancy (in 2010 and 2060) Men

75

80

65

70

55

60

LV SK SI BE BG EE CY LT LU HU MT NL AT PL PT RO DE ES FR SE IE FI UK CZ EL IT DK

Adapting policies (2): the retirement agep g p ( ) gand life expectancy (women)

95 Statutory retirement age and life expectancy (in 2010 and 2060) Women

2010 2060

85

90

Statutory retirement age and life expectancy (in 2010 and 2060) - Women

75

80

65

70

55

60

PL SI LV SK BG RO BE EE CY LT LU HU MT NL AT PT DE ES FR SE IE FI UK CZ EL IT DK

Recent move (1): higher retirement age in PolandPoland (2012 reform)

Retirement age raised: 67 for men by 2020 and for women by 2040 (as from 1 January 2013)

women by 2040 (as from 1 January 2013)

Recent move (2): SlovakiaSlovakia adapts the retirement age and the 2nd pillar (2012 reform)g p ( )

1st pillar: retirement age linked to life expectancy as from 2017expectancy as from 20172nd pillar: Introduced in 2005 (diversion of pension contributions), but hesitant introduction introduction…

2nd pillar: for people entering the labour market:• 2005-08: compulsory: no possibility to opt out after

entry (100% entry rate)• 2008-2011: voluntary, possibility to enter up to 6

months (14% entry rate)• 2012: compulsory: possibility to opt out within 2

years (95% entry rate)• 2013: voluntary: possibility to enter until age

of 35 (13.5% entry rate (assumed))

Policy challenges in the EUPolicy challenges in the EUMario Draghi, ECB

"You know there was a time when Rudi Dornbusch used to say that the Europeans are so rich they can afford Europeans are so rich they can afford to pay everybody for not working.

That's That's gonegone..“

11

WSJ, 27 February 2012

Government debt is very high in the EU, but attaining the budgetary targets (MTOs) would set it on a clear downward path to 60% of GDP

95

100 Gross debt as % of GDP - European Union(% of GDP)

75

80

85

90

Baseline scenario

60

65

70

75

Consolidation scenarios

Baseline scenario

50

55

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

No-policy change scenarioSh k 1 i th h t t /l t i t t t t i d d bt f 2015

12

Shock -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015Shock +1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015Consolidation scenario (0.5% per year on SB) in order to achieve MTOConsolidation scenario (1% per year on SB) in order to achieve MTOConstant average 1998-2007 interest (on new & maturing debt)/growth rates differential

Thank you for your Thank you for your attention!attention!Thank you for your Thank you for your attention!attention!