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Public Pension Reform and Fiscal Consolidation

Public Pension Reform and Fiscal Consolidation. Carlo Cottarelli Director Fiscal Affairs Department May 20, 2010 Paris. Public Pension Spending. Sources: OECD; WEO; and IMF staff estimates.

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Public Pension Reform and Fiscal Consolidation

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  1. Public Pension Reform andFiscal Consolidation Carlo Cottarelli Director Fiscal Affairs Department May 20, 2010 Paris

  2. Public Pension Spending Sources: OECD; WEO; and IMF staff estimates. Note: Countries included in the sample are Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

  3. Pension Spending Across Countries

  4. Role of Public and Private Pensions 120 16 Public Pension Expenditure and Private Pension Fund (in percent of GDP) 14 100 12 80 10 60 8 6 40 4 20 2 0 0 Australia Canada United States United Japan Germany France Italy Kingdom Private Pension Fund Assets (left axis) Pension expenditure (right axis) Source: OECD.

  5. Public Pensions Are an Important Source of Retirement Income Bottom Quintile of Pensioners Income Distribution Top Quintile of Pensioners Income Distribution Average Source: Disney and Johnson (2002).

  6. Demographics Will Have Large Effects on Pension Spending over 2010-50 2009 2030 2050 2009 2030 2050 85 3 83.6 82.4 80.2 2.3 80 78.3 Fertility rate 2.0 Life expectancy 1.9 2 74.6 1.7 75 1.6 1.5 70.1 70 1 65 0 60 Advanced Emerging Advanced Emerging 60 50.4 2009 50 2050 40 28.9 Old-age dependency ratio 30 24.6 20 10.5 10 0 Advanced Emerging Sources: US Census Bureau (2009), European Commission (2009), and IMF staff estimates. Note: Sample include G-20 economies. 6

  7. Pension Reforms Have Taken Different Shapes Main Elements of Pension Reforms in Selected OECD Countries New Zealand DC=Defined contribution; NDC= notional defined contribution. Sources: Martin and Whitehouse (2008), OECD (2007), Whiteford and Whitehouse (2006).

  8. These Reforms Partially Offset Unfavorable Demographics 12 10.3 percent of GDP, 2030 10 1.8 Pension reforms 3.2 Demographic effects 0.4 Employment effects 8.1 percent of GDP, 2030 8 7.1 percent of GDP, 2010 Pension expenditure (in percent of GDP) 6 4 2 0 Sources: US Census Bureau (2009), European Commission (2009), and IMF staff estimates. Note: Sample includes advanced-G20 economies.

  9. Despite Reforms, Pension Spending is Projected to Rise Over 2010-30

  10. Future Pension Spending Will Add Substantially to Public Debt Net Present Value of Future Pension Spending Increases (in percent of GDP) 2010-2030 2030-2050 Average 8.3 23.2 Advanced 8.7 21.5 Emerging 7.8 25.9

  11. Are the Projections Too Optimistic? Key Assumptions in Long-term Pension Projections in the EU Ageing Report (EU-27) Increase: 2000-07 Avg. 2010 2030 2010-2030 Demographic Assumptions Life Expectancy (females) 81.5 82.4 85.3 2.9 Life Expectancy (males) 75.3 76.4 80.0 3.6 Net Migration (% population) 0.3 0.3 0.2 -0.1 Labor Market Assumptions Employment rate (15-64) 64.4 66.6 69.2 2.6 Participation rate (15-64) 70.1 71.4 73.4 2.0 Participation rate (55-64) 44.3 48.9 60.8 11.9 Macroeconomic Assumptions Labor Productivity 1.5 1.7 1.9 0.2 TFP ... 1.0 1.2 0.2 TFP: EU 15 0.7 0.9 1.1 0.2 Source: European Commission (2009).

  12. Sensitivity of Key Assumptions

  13. Risks to the Projections Share of Population 65 Years and Older (in percent) World Western Europe Southern Europe South - East Asia North America Actual Projected Latin America Japan China Africa 0 5 10 15 20 Source: United Nations, National Research Council, 2000, Beyond Six Billion: Forecasting the World's Population and WEO.

  14. Productivity Growth and Assumptions in Selected Countries (EU-27) Average 2000-07=64.4 Average 2000-07=1.5

  15. A Look at Output Levels Real GDP (In levels, 2000=100) Advanced Economies Emerging Economies Oct. 2007 WEO Current WEO

  16. Risks to the Projections Percent change in replacement rates, 2010-30

  17. Parametric Pension Reform Options

  18. Pension Reform: Preferred Option is Raising Retirement Ages 21 Life Expectancy at the Statutory Retirement Age 20.3 Advanced G20 20 19.7 Emerging G20 19 18.5 17.9 18 17 2010 2030

  19. Other Options: Increases in Contributions 60 Tax Wedge, in percent of total labor costs Income taxes Social security contributions, employees and employers 50 9.9 18.6 40 15.0 30 7.2 14.8 14.5 15.8 20 39.4 4.4 33.4 31.5 22.4 10 18.0 16.8 15.8 14.3 0 Canada France Germany Italy Japan Korea United Kingdom United States

  20. Other Options: Benefit Reductions Percent change in replacement rates, 2010-30

  21. EU-5 Countries: Outlook for Fiscal Balance Versus 2006 Stability Program 1/(In percent of GDP) 0 - 1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 2005 2006 2007 2008 2009 1/ Solid line refers to 2006 Stability Program. Dashed line refers to IMF, World Economic Outlook, April 2010 estimates and projections. EU-5 denotes simple average of France, Germany, Italy, Spain, and United Kingdom.

  22. General Government Gross Debt in G-7 Economies, 1950-2015 (In percent of GDP)

  23. Thank You!

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