9/8/2011

1

Pension Reforms RevisitedAsta Zviniene

Sr. Social Protection Specialist

Human Development Department

Europe and Central Asia Region

World Bank

All Countries in the Europe and Central

Asia Region Have Undertaken Reforms

Reforms have

resulted in varied

system designs

Reforms have taken

various pillar

configurations

195

42

Types of PAYG systems in ECA

region

Conventional

PAYG

Point system

Notional

accounts

None

1511

2

Pillar Configuration of ECA

Pension Systems

First Pillar

only

First and

Second

Second Pillar

only

9/8/2011

2

First Pillar Reform Experience –

Retirement Ages:

Effective retirement ages have increased

◦ for new EU member states the average retirement age in the last

two decades has moved from around 56 to 60

but …

◦ life expectancy at 56 in 1990 has been 20.8; now at 60 it is 20.3

◦ women still generally allowed to retire earlier than men

◦ early retirement allowed for substantial part of the population

◦ disability provisions still generous in some cases

First Pillar Reform Experience –

Pension Spending:

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

20082007200620052004200320022001200019991998199719961995

old age pension spending per 65+ population

compared to GDP per capita

Hungary

Romania

Estonia

Lithuania

Bulgaria

Latvia

9/8/2011

3

EU Pension Spending (% of GDP)EuroStat, 2007

o New EU members spend less (8% versus 12%). OECD spends 7.2%.

o New EU members have fewer over 65 year olds, lower contributor base

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

New

EU

mem

bers

All

EU

Euro

are

a

Irela

nd

Lat

via

Est

onia

Rom

ania

Lithuan

ia

Cyp

rus

Icela

nd

Bulg

aria

Slova

kia

Norw

ay

Cze

ch R

epublic

Luxem

bourg

Spai

n

Mal

ta

Slove

nia

Hunga

ry

United K

ingd

om

Belg

ium

Denm

ark

Fin

land

Pola

nd

Sweden

Gre

ece

Neth

erl

ands

Germ

any

Switze

rlan

d

Port

uga

l

Fra

nce

Aust

ria

Ital

ySecond Pillar Reform Experience:

People Like the Individual Accounts

9%

70%

21%

3%

66%

30%

15%

73%

13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Support Don't support I have not heard

All

Women

Men

What is the public opinion with respect to reduction in contribution to 2nd pillar? (from Swedbank in Latvia)

9/8/2011

4

Rates of Return Have Been Reasonable

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Real RoR until 2007

RoR until 2007

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

Estonia Lithuania Slovak Republic

Poland Hungary

Real RoR 2008-10

2008

2009

2010

Funded Pillars Allow to Pre-pay

Future Obligations of Public System

(7.0%)

(6.0%)

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

% o

f G

DP

Projected Pension System Deficits

Without funded pillar

With funded pillar

9/8/2011

5

Financial Crisis Has Led to Some

Reform Reversals Financial crisis led to loss in revenues

◦ Contribution revenue fell

◦ Pension expenditures rose as the unemployed turned to disability and early retirement

◦ Overall fiscal revenue declined making the financing of pension deficits more difficult

Many of the added generosities in the first pillar have been removed

Partial or complete reversal of second pillars

◦ Hungary – nationalized the pension funds

◦ Latvia – reduced second pillar contributions from 8% to 2%

◦ Lithuania – reduced second pillar contributions from 5.5% to 2% - now proposes that if individual is willing to put in an additional 2%, the government will match that voluntary amount

◦ Estonia – redirected state contributions to second pillar to first pillar in 2009 and 2010, but has now returned to 2% in 2011 and will rise to the original 4% in 2012

◦ Romania – postponed planned increase in second pillar contribution in 2010, but has begun raising the contribution rate in 2011

◦ Poland – proposed reducing second pillar contribution from 7.3% to 2.3%, with the possibility of an increase in the future

Other countries are adding or considering adding second pillars

◦ Czech Republic, Slovenia, Ukraine, Armenia

What Would be the Consequences of 2nd pillar Contribution Reduction? (Swedbank, Latvia)

7%

2%

6%

9%

15%

18%

19%

24%

0% 5% 10% 15% 20% 25% 30%

Other

Higher social security

payments in the future

Incentive to care by myself

Consider leaving the country

Reduce motivation to pay

taxes

Reduce future pension

Consider to pay taxes

elsewhere

Destroy trust in pension

system

High risk of tax

avoidance

Source: Snapshots questionnaire August 2010

9/8/2011

6

Unexpected Outcomes from

Second Pillars Not as immune to political interference

as hoped

Limited financial literacy limits competition among funds

Debt-financing of transition costs has led to unsustainable debt levels

Management of pension funds costlier than expected in some countries

Overly conservative portfolios have led to lower rates of return

What are these Reforms and Reversals

Trying to Achieve?

Objectives of pension system:◦ alleviate poverty in old age

◦ provide a mechanism for individuals to partially replace their wage income

◦ are there enough resources to achieve both?

Stability of the pension policy requires that pensions are:◦ affordable in the short and long run

◦ seen as adequate

◦ seen as fair, both inter-generationally and intra-generationally

9/8/2011

7

New Realities for Central Europe

EU accession and increased market integration

Tighter enforcement of the Stability and Growth Pact

New fiscal challenges arising from slower growth following the financial crisis

Disillusion with “miracle” cures in pension systems

Starker demographics

◦ Sharper decline in fertility

◦ Prolonged emigration

◦ Persistent informality

Fertility Rates Have Dropped by a

Third Between 1990 and 2010

50%

60%

70%

80%

90%

100%

110%

20102005200019951990

Number of Children under 5 compared to 1990

Euro area (15 countries)

10 new members

9/8/2011

8

Working Age Population is Shrinking

Due to Emigration

70.00%

80.00%

90.00%

100.00%

110.00%

120.00%

130.00%

Shrinking number of 30-35 year

olds remaining in central Europe

Resulting Decline In Working Age

Population

0%20%40%60%80%

100%120%140%160%180%200%

Alb

ania

Arm

enia

Aze

rbaijan

Belaru

sB

osn

iaB

ulgaria

Cro

atiaC

zech

Republic

Esto

nia

Georgia

Hungary

Kazak

hstan

Kyrgyz R

epublic

Latvia

Lith

uan

iaM

acedonia

Mold

ova

Monte

negro

Polan

dR

om

ania

Russian

Federatio

nSe

rbia

Slovak

iaSlo

venia

Tajik

istanTu

rkey

Turk

menistan

Ukrain

eU

zbekistan

2010 2050

9/8/2011

9

Aging of the Population

Percentage of the population over 65

0

5

10

15

20

25

30

35

2010

2050

Central Europe Had Unusually High

Coverage Rates Prior to Transition

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0 5 10 15 20 25 30

Co

ntr

ibu

tors

as

% o

f L

abo

r F

orc

e

Per Capita Income on PPP Basis

Relationship between Per Capita Income and Contributor Coverage

ECA Average

9/8/2011

10

These Factors Add up to significant

Increase in Future Obligations

(7.0%)

(6.0%)

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

% o

f G

DP

Projected Pension System Deficits

Without funded pillar

With funded pillar

Before dismantling the second pillar, useful to

have social dialogue on other options

Want to avoid instability and loss of credibility in policy making

Alternatives:

◦ adjust expectations on what is adequate / fair

◦ raise retirement ages further

◦ lower benefits further to be supplemented with voluntary savings

◦ actively seek immigration from areas with unemployed youth

◦ shift some income unrelated benefits to general budget

9/8/2011

11

End of 19th – beginning of 20th century - > Civil servants,

occupational schemes

Workers in industry

and commerce

Before World War II- >

Farmers, domestic workers,

self-employedSince 1950s - >

Increased female LF participation, higher

retirement ages, baby boomers

Since 1960s - >

21st century:

Where to find new recruits? - >

What happens if they can not be found?

Immigrants? Mothers of young children?

Young retirees? Partially disabled?

Is Status Quo Fair / Sustainable?

Coverage & Retirement Age,

Selected Countries

55

57

59

61

63

65

67

69

0%

10%

20%

30%

40%

50%

60%

70%

80%

Pola

nd

Bulg

aria

Gre

ece

Fra

nce

Belg

ium

Germ

any

Fin

land

Aust

ria

Neth

erl

ands

United …

Sw

eden

United S

tate

s

Norw

ay

Sw

itze

rlan

d

Age

Coverage

Earliest

retirement

age

Ret. age

trendline

o Coverage is typically calculated as number of contributors over

population aged 20-65

o Surest option to increase coverage statistic is to increase retirement age

9/8/2011

12

Belarus: Majority of People at Current

Retirement Age Are Able to Work

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

55-59, male

60-64, male

65-69, male

55-59, female

60-64, female

65-69, female

fully retired

working

pensioners

not yet retired51%

30%47%26% 17%

o 71% of early retirees continue to work (why have this scheme at all?)

o Disability and unemployment programs would provide a safety net

Lithuania: 50% of Population Continue

Working after Reaching Retirement Age

0%

20%

40%

60%

80%

100%

120%

55 56 57 58 59 60 61 62 63 64 65

Men

0%

20%

40%

60%

80%

100%

120%

55 56 57 58 59 60 61 62 63 64 65

Women

0%200%

55 56 57 58 59 60 61 62 63 64 65

contributors disabled, not working

working pensioners and disabled pensioners not working

9/8/2011

13

Life Expectancy at Age 65EuroStat, 2007

12

13

14

15

16

17

18

19

20

21

o Old EU members:19; new EU members: 16. Selected FSU: 15 – not such a

big difference! Compare with 10+ year gain in less than 40 years in OECD

or 4 year gain in 20 years in new EU member states

Life Expectancy at Statutory Retirement AgeEuroStat, 2007

Men Women

o New EU member states and FSU can not afford retirement lengths of old

EU members; even old EU members can not afford them and are starting to

reform

o Gender difference in old member states: 4.6; new member states 5.4; FSU:

7.4 years

12

14

16

18

20

22

24

26

12

14

16

18

20

22

24

26

9/8/2011

14

Raise Retirement Ages

Need a social consensus that people cannot continue to retire young

May need to consider modifications more applicable to an aging workforce – for example, part-time work, pay scales, etc.

May need to include lifelong learning and retraining opportunities

Clearly a win-win-win proposition◦ Labor force expands

◦ Number of retirees are reduced

◦ Pension adequacy is maintained

Raise Retirement Ages to 70 by 2047

(7.0%)

(6.0%)

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

2055

2057

2059

2061

2063

2065

2067

2069

2071

2073

2075

Projected Deficits with Retirement Age Increase

Current

Ret Age Ad

9/8/2011

15

OECD: Average Pension / Net Average Wage for Full

Career Workers looks generous, but…

0

20

40

60

80

100

120

Pen

sion

/Ave

rage

Wag

e

o Requires 45 year career

o Many of these OECD schemes are not sustainable and will have to be

reformed

OECD Accrual Rates

0 0.5 1 1.5 2 2.5 3 3.5

TurkeySpainMalta

PortugalItaly

AustriaFrance

LuxNetherlands

FinlandBelgium

KoreaSwedenIceland

SwitzerlandUS

HungaryGermany

NorwayJapan

CanadaUK

o Average accrual rate of <1.5% suggests that a 45% gross benefit

after 30 years of service is considered reasonable in OECD. Pensions

can only be higher with substantially longer careers

9/8/2011

16

Indexation Price Indexed

Belgium, Canada, France, Iceland, Italy, Japan, Portugal, Spain, UK, US

Discretionary

Austria, Greece, Luxembourg, Sweden

80% Price-20% Wage

Finland

50% Price-50% Wage

Switzerland

Wage Indexed

Denmark, Germany, Netherlands, Norway

Price, 10

Discreti

onary, 4

80-20, 1

50-50, 1

Wage, 4

Price Indexed

Azerbaijan, Serbia, Turkey, Uzbekistan, Latvia, Bulgaria

Discretionary

Albania, Armenia, Georgia, Kazakhstan, Russia, Lithuania

Dependant on GDP growth

Hungary, Estonia

80% price-20% wage

Poland, Ukraine

2/3 price-1/3 wage

Czech Republic

50% price-50% wage

Croatia, Slovak Republic, Macedonia, Moldova, Montenegro

100% wage

Belarus, Bosnia, Romania, Slovenia, Tajikistan

price, 6

discretionary, 6

dependant

on GDP, 280-20,2

67-33, 1

50-50, 5

wage, 5

OECD

ECA

Changes in Pension Indexation

Focus should be on maintaining the pensioner’s absolute consumption basket in retirement

With declining labor force, relatively sharp increases in productivity and consequently, wages, are hoped for to help mitigate the impact of demography on the wage bill

If these increases are directly shared with pensioners, when wages increase to alleviate the reduction in number of workers, benefits will be raised, resulting in much larger fiscal problems

Focus of public system has to be on poverty alleviation and not on maintaining relative position of pensioner

To be complemented with additional savings by workers if desired

9/8/2011

17

Reduce Benefit Levels By

Approximately 40%

(7.0%)

(6.0%)

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)2011

2015

2019

2023

2027

2031

2035

2039

2043

2047

2051

2055

2059

2063

2067

2071

2075

Projected Deficits with

Benefit Decrease

Current Ben Level Adj

.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2011

2015

2019

2023

2027

2031

2035

2039

2043

2047

2051

2055

2059

2063

2067

2071

2075

Projected Benefit Levels

Relative to Average Wage

Current Ben Level Adj

Funded Pillar

o Diversification of risk is still relevant◦ Timing of shocks to financial asset prices considerably

different than timing of crisis on PAYG benefit levels

o Aging of population◦ Benefit levels will likely fall further in the future

◦ To maintain adequacy of benefits, will need to save either on voluntary or mandatory basis

o But need to have adequate preparation◦ Fiscal space

◦ Adequate financial markets

◦ Adequate supervision and regulation

9/8/2011

18

Forthcoming World Bank Report

Looks at what actually happened in the

reform countries in the last 20 years

Aims to contribute to the dialogue on

how each country can best move forward

Thank You