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Equity Analysis for Pensions (Social Insurance)

Explore the objectives, implications, and fiscal sustainability of pension systems, focusing on reducing poverty, intergenerational equity, and financial redistribution. Learn about the OECD countries' pension structures and tools for ensuring equity within cohorts.

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Equity Analysis for Pensions (Social Insurance)

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  1. Equity Analysis for Pensions (Social Insurance) Anita M. Schwarz ECSHD May 2006

  2. Objectives of a Pension System • Reduce poverty among the elderly • Smooth consumption between working years and retirement years • Implication: those who earn and consume more in working years will consume and earn more in retirement years • Very different from other public expenditure programs which ideally would be designed to allocate equal or greater share of expenditures to the poor

  3. Example from OECD countries, Pensions at a Glance

  4. Pensions at a Glance

  5. Pensions Based on Contributions • Coverage limited to those who pay; benefits based on level and duration of contributions • Less than 50% of the labor force is paying contributions – likelihood of paying goes up with income • Unsurprisingly, expenditures go to higher income groups

  6. Important Redistributions Nonetheless • Redistribution from those outside the system to those within when there are fiscal deficits • Redistribution across generations – younger cohorts pay more with aging of the population • Redistribution within covered cohort • Progressive benefit formula • Minimum pension

  7. Fiscal Sustainability

  8. Fiscal Sustainability • Someone has to pay the future pensioners • Either paid from outside the system • Partial default due to rules change • Redistribution from outside the system to within • Intergenerational equity

  9. Equity within a Cohort

  10. Sometimes Need to Look Beyond Pension System for Intracohort Equity • Sometimes means-tested pension benefits available in addition to contributory • Sometimes basic benefits available to all • Sometime pensioners eligible for same social assistance as other age groups

  11. Tools • PROST model: • Fiscal analysis • SR and LR sustainability • Implicit pension debt • Individual level social analysis • Vary starting age, retirement age, starting wage, wage growth, work history, and mortality experience • Pensions as percentage of economy wide wage • Pensions as percentage of own final salary • Internal rate of return provided by pension system

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