Long-run Pension System Reforms in Europe and
Central Asia
Anita M. SchwarzLead Economist
Human Development Department
Europe and Central Asia Region
World Bank
May 2009
Population in Region is Aging
0-1420%
15-6469%
65+12%
Population Structure in 2005
0-1416%
15-6462%
65+22%
Population Structure in 2050
What Used to Be Affordable May Not Be in the Future
Relatively low retirement ages– Differential between retirement age for men and
women Relatively generous early retirement provisions Wage indexation of benefits after retirement to
maintain pensioner’s position relative to workers Relatively generous benefits for limited years of
contribution
Most OECD Countries Set Retirement Age at 65
Austral
iaAust
ria
Belgium
Canad
a
Denmark
Finland
France
Greece
German
y
Icelan
dIre
land
Italy
Japan
Luxem
bourg
Netherl
ands
New Zea
land
Norway
Portug
alSpa
in
Sweden
Switzerla
nd
Turkey
2048 UK US
40
45
50
55
60
65
70
Age of Retirement in OECD Countries
Male
Female
Most Have Equalized or are Equalizing Retirement Ages for Men and Women
Only France has retirement age below 65 for men and women
Only Austria, Greece, Italy, and Switzerland maintain retirement age differences between men and women
ECA Region Retirement Ages
Albania
Armen
ia
Azerb
aijan
Belaru
s
Bosnia
FBIH
Bosnia
RS
Bulgari
a
Croati
a
Czech
Rep
ublic
Estonia
Georg
ia
Hunga
ry
Kazak
hstan
Kosov
o (UN 12
44)
Kyrgy
zstan
Latvia
Lithua
nia
Mac
edon
ia
Mold
ova
Mon
teneg
ro
Poland
Roman
ia
Russia
n Fed
eratio
n
Serbia
Slovak
Rep
ublic
Sloven
ia
Tajikis
tan
Turke
y
Turkm
enist
an
Ukrain
e50
52
54
56
58
60
62
64
66
Men
Women
Retirement Age Recommendations
Raise retirement age to 65 Equalize retirement ages for men and
women Plan to raise higher in the future as life
expectancy rises– Notional account systems automatically reduce benefits
as life expectancy rises– Legislate automatic adjustment in retirement age as life
expectancy rises
Prevalence of Early Retirement
60+13%
1-5 years78%
5+ years9%
Women's Retirement in Poland, 2007
65+; 29%
1-5 years earlier; 50%
6-10 years;
5%10+ years; 16%
Men's Retirement Pattern in Poland, 2007
Few Penalties for Early Retirement
A few countries impose actuarial reductions on early pensions; most do not– Actuarial fairness would require reductions of about
6-7% of the pension per year of early retirement
Some require additional contributions for privileged occupations, but does not cover early retirement
Recommendations
Eliminate early retirement– Results in low pensions which then raises pressure to
lift overall level of pensions
Impose actuarial reductions on pensions received early
Require additional contributions for early retirement, including to cover longer duration of retirement
Should Pensioners Share in Worker Wage Growth?
General view in the region that when wages rise, pensions should rise proportionately
Also the view originally in Europe – pensioners should share in growth
Found to be too expensive as the number of pensioners grew with aging
Now the prevalent approach is protecting the retiree’s purchasing power through inflation indexation and encouraging additional savings if the retiree wants more– Preferable to lowering the initial pension for the retiree and then adjusting to
wage growth because pensioner needs typically do not increase over retirement period
OECD 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
Discretionary; 4
80-20; 1
50-50; 1
Wage; 4
ECA Indexation Price Indexed
– Azerbaijan, Serbia (?), Turkey, Uzbekistan
Discretionary– Albania, Armenia, Georgia, Kazakhstan,
Russia 80% price-20% wage
– Poland, Ukraine 2/3 price-1/3 wage
– Czech Republic 50% price-50% wage
– Croatia, Estonia, Hungary, Slovak Republic, Bulgaria, Latvia, Macedonia, Moldova, Montenegro
100% wage– Belarus, Bosnia, Romania, Slovenia,
Tajikistan
Price; 4
Discretionary; 5
80-20; 2
2/3-1/3; 1
50-50; 9
25-75; 1
Wage; 5
Recommendation
Move to inflation indexation as soon as feasible
Countries can legislate that some component of wage growth will be included in the exceptional years when real wage growth exceeds 10%
Otherwise limit discretion since it creates uncertainty for pensioners
Generosity Varies in Region
Some schemes provide modest benefits Others provide quite generous benefits, particularly in relation
to years of contribution – 50-60% of gross wage for as few as 25-30 years of service
OECD schemes might provide similar benefits for full pensions, but full pensions are only received after 45 years of contribution– OECD schemes are also typically not sustainable and will need to be cut further
Cannot compare euro equivalent of pensions across countries because cost of living, wages, and affordability vary across countries
OECD Accrual Rates
TurkeySpainMalta
PortugalItaly
AustriaFrance
LuxNetherlands
FinlandBelgium
KoreaSwedenIceland
SwitzerlandUS
HungaryGermany
NorwayJapan
CanadaUK
0 0.5 1 1.5 2 2.5 3 3.5
Accrual Rates in OECD Countries
Average accrual rate is <1.5% suggesting that a 45% benefit after 30 years of service is more appropriate than the 60-70% currently expected
Recommendation
Expectations need to be adjusted so that people understand that benefit rates from the past are not applicable in today’s world
Individuals need to understand that higher pensions will require higher personal saving
New Problem: Low Contributor Coverage Leads to Low Coverage of Future Elderly
OECD Coverage ECA Coverage in Selected Countries
Austra
lia
Belgiu
m
Denmark
Fran
ce
Greece
Irelan
dJa
pan
Netherl
ands
Portu
gal
Swed
en UK
20
30
40
50
60
70
80
90
100
110
Alban
ia
Croati
a
Estoni
a
Hunga
ry
Kyrgy
z Rep
Lithua
nia
Mol
dova
Roman
ia
Slov
ak R
ep
Ukrain
e 20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
Contributors of Today are Pensioners of Future
Governments will need to provide some resources for the elderly without access to pensions
Options:– Universal social pension– Means-tested social pension– Integration of elderly with or without pensions
into social assistance system
Future of Multipillar Reforms
Diversification of risk– Timing of shocks to financial asset prices considerably different
than timing of crisis on PAYG benefit levels
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
But need to have adequate preparation– Fiscal space– Adequate financial markets– Adequate supervision and regulation
Concluding Recommendations
Raise and equalize retirement ages Curb early retirement Focus indexation on protecting the purchasing
power of the elderly Publicize realistic expectations for future pensions Design and finance poverty alleviation for the non-
covered future elderly Careful planning necessary if adopting second
pillars
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