Social protection Floors for social and economic stabilization

1. Social protection Floors for social and economic stabilization Institute of Retirement Fund in South Africa Annual Conference The Evolving Retirement Landscape – Shaping inclusive growth. Luis FrotaSocial Security Specialist

2. In the long run social security systems need two types of stabilization: financial and social. • Most of the reform debates over recent decades were triggered by the need for financial stabilization • Policies focused on the two major expenditure blocks within national social budgets, namely, pensions and health care.

3. Contents • Effects of recent crises on pensions funds • Brief historical background on financial stabilization reforms • Social stabilization in times of crisis • Benchmarking social adequacy • The modern contribution of social protection floors to social stabilization of security security

4. National pension reserves are likely to feel the impact of the global crisis for a long time…

5. During the crisis, pension reforms have: 1) rendered pension systems more vulnerable to economic shocks and 2) have shifted financial and economic risks to individuals. • Some countries have directly tapped into national pension reserves while others have modified the regulations of pension funds to give the government a greater say in the investment policy

6. In 2010/2011 the capital market rebound led to a recovery of savings to pre-crisis levels but a number of contributors – notably those saving in higher risk portfolios – have effectively lost up to two years of savings. • They contributed to their old-age income systems without any impact on their pension level, which demonstrates the inherent uncertainties created by entirely capital market-based old-age income security systems.

7. A brief historical background… • From the end of the 1990s: • WB model (notably its focus on the forced savings component). • Following the Chilean reform, 11 more countries in Latin America included mandatory savings tiers in their pension systems • ILO stressed the importance of : • adequacy of benefit levels (to provide income security in old age and thus give people the right to affordable retirement), • extension of coverage (with the ultimate objective of making it universal), • role of good governance as sine qua non conditions for the proper functioning of all pension systems.

8. ILO position summed up in 2000 by OECD author: “The ILO is fundamentally unwilling to accept systems which cannot guarantee insured persons with a full contributions record any more than benefits at the subsistence level”

9. The crisis of 2008 and beyond has led to new developments. • Argentina and Bolivia have effectively reversed their reforms based on individual accounts. • In some parts of Central and Eastern Europe, countries are debating the resizing of the private tier of their pension systems

10. It is often overlooked that.. • A substantial number of European countries adopted so-called “parametric reforms” of their pension systems: • Ex. These countries included Germany and France. • Others have introduced self adjustment mechanisms in their pension formulas • Sweden and Italy notional defined contribution (NDC) principles in determining future benefit levels • In Brazil, Finland, Portugal accrual rates in DB pensions are reduced with the increased life expectancy

11. Adequacy in social security benefits when • they help to achieve expected social policy outcomes (e.g. meeting the needs of people who have to cope with life’s essential risks) • the relationship between benefit levels and taxes and/or contributions paid during a working life is considered to be “fair” (social adequacy); • they work in synergy with employment instruments and fiscal and other economic policies, and do not result in unwanted economic consequences(economic adequacy).

12. The concept of social stabilization has been neglected for some time… • Social stabilization implies that pension levels are not allowed to fall below a certain minimum benchmark • ILO social security Conventions are the only globally agreed legal instruments defining such benchmarks. • Convention No. 102 requires a pension to be at least 40 per cent of “the total of the previous earnings of the beneficiary” after 30 years of service (Article 65(1)), in cases where these previous earnings are lower than average. • This can therefore be considered a benchmark for the minimum replacement rate necessary for the social stabilization of a pension scheme.

14. Countries have been strengthening institutional responses to chocks… • By providing an adequate national basic social protection floor • As a guarantee for all : social floors are effective in reaching all population • Some level of social adequacy is provided (maintaining some minimum living standards) against all odds and circumstances • Cater for unfavorable evolutions in labor market • Are affordable and financially predictable financial outlays • Many countries in OECD and emerging economies now provide a floor in retirement and health

15. … by strengthening social security guarantees • By instituting and strengthening social insurance and its income maintenance function and minimum target replacement rates • Research showing that fiscal policies tend to be pro-cyclical in developing countries (there is less money in the coffers when there is crisis; and more pressure for spending when there is money) contrary to the situation in modern economies. • Reinforcing contribution social security funds may help States build in automatic stabilizers and reduce budget volatility as results of external chocs • There has been a convergence towards forms of guarantee in retirement provision in DC (ex. return guarantees) and DB (self adjustment mechanisms)

16. high Voluntary insuranceunder government regulation Level of protection Contributory social security benefitsof guaranteed levels Social Protection Floor*Access to essential health care and minimum income security for all low low individual/household income high The ILO‘s two-dimensional strategy for the extension of social security coverage; ILC 2011.2012 When voluntary private pensions, are added, the average replacement rate is 64% • Vertical dimension: progressively ensuring higher levels of protection guided by C.102 andhigher-level standards Average RR in public schemes: 42% in public schemes/ 57% when mandatory private pensions included. In OECD, Tax financed retirement benefits are worth 21.6% of economy-wide mean earnings Coherent and efficient architecture of national social security systems; basic guarantee schemes compatible with higher level benefits arrangements such as social insurance schemes • Horizontal dimension:Guaranteeing access to essential health care and minimum income security for all

17. For workers with average earnings, GRR ~ 57% in 34 OECD countries (~median wage workers). For Japan, Mexico and the United Kingdom future RR are < 35% to people starting work today. Countries with RR >70% and <90% are Greece, Austria, Denmark, the Netherlands and Spain. Brazil Sweden For non-OECD countries a wide range in RR, with South Africa and Indonesia below 15% Canada South Africa

18. Risks of recent trends to adequacy and quality of benefits; value of ILS Current socio demographic and economic challenges may erode social security if not adjustedConventions stipulate that the minimum benefits levels have to be maintained throughout the contingency and that they shall be reviewed “following substantial changes in the general level of earnings where these result from substantial changes in the cost of living” (Articles 65, paragraph 10, and 66, paragraph 8, of Convention No. 102) or “following substantial changes in the general level of earnings or substantial changes in the cost of living” (Article 29, paragraph 1 of Convention No. 128). Reforms for the sustainability of social security systems may hamper benefit adequacy or quality of services- Reforms with the effect of reducing the average replacement rate and measures to moderate benefit adjustments should respect prescribed minimum benefit levels laid down in Convention No. 102 (see, for example, Article 28 in conjunction with Articles 65, 66 or 67 for old-age benefit, and Article 56 in conjunction with Articles 65, 66 or 67 for invalidity benefit). Changes in the Labour Market may preclude millions from accessing adequate benefits - The minimum conditions for entitlement to benefits under the Convention must also be respected when reforms are being implemented (e.g. under Article 29 for old-age benefit and Article 57 for invalidity benefit). For countries that have ratified Convention No. 128, similar provisions setting out higher standards apply (Articles 10 and 11 in conjunction with Articles 26 to 29 for invalidity benefit, and Articles 17 and 18 in conjunction with Articles 26 to 29 for old-age benefit).

19. Reforms in OECD • new pension systems will reduce replacement rates significantly both in paradigmatic and parametric reforms • however, these reductions are more predictable than the ones resulting from paradigmatic reforms. Also people will feel individually (and not collectively) stronger the effects on RR resulting from deteriorating LM in DC schemes

20. In some cases there may be some justification for reducing benefit levels • Costs control mechanisms are needed • Governance is key in DC as well as DB

21. By way of conclusion: quality policy making is also needed • Actuarial and social budget valuations must feed a policy process to determine adjustments in social security to long term evolutions, in which benefit adequacy must be balanced with financial sustainability • There is a role for full participation of workers, employers and governments in standard setting, creating and maintaining systems and structures to monitor, verify and adjust responsibly.