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Comparing pension systems

Comparing pension systems. Methodology Selected results for OECD countries, Eastern Europe/Central Asia, Latin America/Caribbean Edward Whitehouse. Comparing pension systems. Fiscal approach: projections of pension expenditure Institutional approach: describing pension systems’ parameters

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Comparing pension systems

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  1. Comparing pension systems Methodology Selected results for OECD countries, Eastern Europe/Central Asia, Latin America/Caribbean Edward Whitehouse

  2. Comparing pension systems • Fiscal approach: • projections of pension expenditure • Institutional approach: • describing pension systems’ parameters • Income-distribution analysis: • comparing incomes of older people and the population as a whole

  3. A microeconomic approach • Model of pension entitlements at the individual level • Goal: quantitative indicators of pension-system parameters for cross-country monitoring of retirement-income systems • Consistent across a broad range of countries • Covers all mandatory pensions • resource-tested schemes (including social assistance) • basic schemes • minimum pensions • earnings-related public and mandatory private schemes • mandatory defined-contribution plans • Includes effect of personal income tax and social security contributions

  4. A microeconomic approach • Full-career workers • contribute every year from age 20 (or standard entry age) to normal pension eligibility age • Across the earnings distribution: (0.3 to 5 times average pay) • All currently legislated reforms fully in place • ‘steady-state’ assumption • new labour-market entrants • Macroeconomic assumptions • earnings growth (individual and economy): 2% • real rate of return (on funded pensions): 3.5% • discount rate (for actuarial calculations): 2% • mortality rates: latest data for individual countries and regional averages

  5. Results • Relative pension value • pension entitlement as a proportion of economy-wide average earnings • Indicators of • redistributive power of pension systems • overall generosity of schemes: average pension value • potential resource transfer to pensioners: average pension wealth

  6. Pension values

  7. Pension values: OECD

  8. Pension values: OECD

  9. Pension values: OECD 2 1.75 1.5 1.25 1 Gross pension value Belgium .75 Switzerland .5 Norway .25 0 0 .5 1 1.5 2 2.5 Earnings

  10. Pension values: OECD

  11. Pension values: OECD

  12. Pension values: OECD

  13. Pension values: ECA 2 1.75 1.5 1.25 1 Gross pension value Lithuania Bulgaria .75 Croatia .5 .25 0 0 .5 1 1.5 2 2.5 Earnings

  14. Pension values: ECA

  15. Pension values: LAC 2 Costa Rica 1.75 1.5 1.25 1 Gross pension value .75 Dominican R .5 .25 0 0 .5 1 1.5 2 2.5 Earnings

  16. Pension values: LAC 2 Costa Rica 1.75 1.5 Colombia 1.25 Peru El Salvador 1 Gross pension value Chile .75 Mexico Dominican R .5 .25 0 0 .5 1 1.5 2 2.5 Earnings

  17. Pension values: LAC 2 Costa Rica 1.75 1.5 Colombia 1.25 Peru El Salvador 1 Gross pension value Chile Argentina .75 Mexico Dominican R .5 .25 0 0 .5 1 1.5 2 2.5 Earnings

  18. Pension values: LAC 2 Costa Rica 1.75 Uruguay 1.5 Colombia 1.25 Peru El Salvador 1 Gross pension value Chile Argentina .75 Mexico Dominican R .5 .25 0 0 .5 1 1.5 2 2.5 Earnings

  19. Redistributive power • All pension systems redistribute income in many complex ways both between and within generations • Focus on one aspect: pension benefits of workers at different earnings levels • An ‘index of redistributive power’ of pension systems that • is zero if rich and poor workers get the same replacement rate (e.g., most funded plans, some public, defined-benefit schemes) • is one if rich and poor workers get the same pension amount(e.g., a universal, flat-rate ‘citizens pension’)

  20. Role of the tax system • Personal income tax systems are progressive • so average effective tax rates are lower for people when they are retired than when they were working (if replacement rates are less than 100 per cent) • Most countries have concessions for older people in their personal income taxes • favourable treatment of pensioners (e.g., extra allowances) • favourable treatment of pension income • Pensioners usually not liable for social security contributions (or pay at a much reduced rate) • Therefore, net replacement rates are higher than gross • the personal tax system plays an important role in old-age support

  21. Difference in taxes paid by workers and pensioners

  22. Difference in taxes paid by workers and pensioners

  23. Difference in taxes paid by workers and pensioners

  24. Gross and net replacement rates: Germany

  25. Structure of net replacement rate: Germany

  26. System generosity • Calculate average pension value relative to economy-wide average earnings • Use same synthetic earnings distribution for all countries

  27. System generosity • Calculate average pension value relative to economy-wide average earnings • Use same synthetic earnings distribution for all countries

  28. Potential resource transfer • Convert weighted average of relative pension value into pension wealth • Relationship between pension value at retirement and pension wealth depends on: • indexation of pensions in payment • pension eligibility age • country-specific mortality

  29. Calculating pension wealth • Pension eligibility age

  30. Calculating pension wealth • Indexation

  31. Calculating pension wealth • Country-specific mortality • e.g., life expectancy of Hungarian men is six years below OECD average • this reduces value of pension wealth by 19 per cent • in Australia, France, Japan, New Zealand and Switzerland, life expectancy is two years above OECD average • this increases value of pension wealth by 7-8 per cent

  32. Structure of pension systems: role of basic schemes New Zealand Ireland Argentina United Kingdom Netherlands Japan Norway Canada Lithuania Czech Republic Estonia 0 25 50 75 100 Per cent of weighted average of total pension wealth by source Basic Means-tested DB DC

  33. Structure of pension systems: role of targeted schemes Dominican R Canada Australia Iceland Colombia 0 25 50 75 100 Per cent of weighted average of total pension wealth by source

  34. Structure of pension systems: role of DC schemes Peru Mexico Chile El Salvador Colombia Dominican R Argentina Uruguay Costa Rica 0 25 50 75 100 Per cent of weighted average of total pension wealth from DC scheme

  35. Structure of pension systems: role of DC schemes Peru Kazakhstan Mexico Chile El Salvador Colombia Australia Croatia Dominican R Latvia Poland Macedonia Estonia Lithuania Argentina Hungary Uruguay Costa Rica Bulgaria Sweden 0 25 50 75 100 Per cent of weighted average of total pension wealth from DC scheme

  36. Conclusions • Microeconomic modelling of individual pension entitlements is a useful tool • consistent approach across countries with very different retirement-income systems • forward-looking • comprehensive: covering all mandatory sources of retirement income • incorporates effect of tax system • can isolate the impact of pension policy choices from the effects of earnings distribution, macroeconomic performance and demographics on the retirement-income system

  37. Future • Gender • Disability and survivors’ benefits • Pension entitlements and age of retirement • Sensitivity analysis • Partial careers • Special schemes (e.g., public-sector workers) • Voluntary schemes (e.g., occupational plans) • Incorporate financing of benefits • Extend to other regions • Regular updates

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