Csaba Feher

1. International Trends in Pension ReformsRegional Pension Policy WorkshopMajuro, April 25-29, 2016 Csaba Feher Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management

2. Drivers of Reforms • Primarily: short-term fiscal considerations • Existing or imminent social security deficits • Declining compliance and ineffective enforcement plus • …early retirement and disability > high system dependency • Long-term sustainability considerations • Demographics: life expectancies, fertility, migration, • Actuarial imbalances: post-war windfall, coverage expansion, design shortcomings • Fairness • Lack of uniformity: special regimes for preferred sectors • Intergenerational inequity: net transfers vs. net taxes • Ideology • Smaller and different role for the state • Greater reliance on private sector and individual responsibility

3. Types of Reform Parametric Reforms (e.g. retirement age, indexation, benefit formula) • Objectives - unchanged • Instruments, size - unchanged • Parameters - amended Structural (e.g. partial privatization and later nationalization) • Objectives - unchanged • Instruments, size - amended • Parameters - amended Paradigmatic (e.g. poverty alleviation or consumption smoothing only) • Objectives - amended • Instruments, size - amended • Parameters - amended

4. Parametric DB reforms: examples • Eligibility • Harmonization between men and women, and across schemes/occupations; • Tightening early retirement conditions; • Increasing normal retirement ages • Automatic adjustments reflecting changes in age-specific life expectancy; • Minimum service time requirement • Indexing benefits • Marked shift away from wage indexation to CPI or CPI-heavy composites; • Conditional and bounded indexation; • Automatic adjustments reflecting some fiscal benchmark; • Parameters/formulae • From final salary towards full career; • Relatively higher accrual (or at least not less) for later years of service; • Benefit caps

5. Structural Reforms: Examples • Expanding coverage • Reducing categorical exemptions of occupations, types and levels of income • Non-contributory basic pensions, supplements and social pensions; • Matching contributions, auto-enrollment; • Parallel mandates (multi-pillar systems) • Augmenting unfunded DB with DC to address single issuer risk and lack of geographic diversification; • Unification, uniformity • Closing (possibly liquidating) civil service and other special schemes; • Privileged pensions pre-funded • Gradual enforcement of uniformity across schemes even if institutional segregation prevails;

6. Paradigmatic Reforms: Examples • Eliminating ex-ante, intentional redistribution • Replacing traditional Bismarckian social security with privately managed DC • Reducing the role of the state to poverty alleviation • Replacing earnings-related DB schemes with basic flat; • Changing the nature of state involvement • State becomes regulator and ultimate guarantor instead of operator of DC schemes; • Re-allocation of longevity risk in the payout phase • Mandating partial or full annuitization instead of / in addition to lumpsum and phased withdrawal;

7. Constraints to Reforms • Legal – Constitutional • General principle of prohibiting retroactive legislation; • Legal/constitutional protection of earned rights (broad range of interpretations) • Fiscal • Some reforms are very pricey • Distributional and welfare • Time needed to adjust expectations • Prevalent perception of equity • Contextual, Administrative • Financial sector development • Lack of data and administrative infrastructure • Political • Rent-seeking behavior by both pensioners and politicians;

8. Fiscal Impact • Cash/flow and accrual/stock consequences can have the same or opposite directions and can differ greatly in magnitude! • Quickest cash and accrual yields: stock of pensioners • Benefit indexation (depending on price and wage dynamics) • Nominal, real or relative caps and cuts, including benefit taxation • Slow cash and accrual yields: future retirees • - Benefit formula • Positive cash yields and possibly ambiguous accrual impact • Revenue expansion: contribution base, rate • Retirement age increase • Negative cash yields and ambiguous accrual impact • Partial privatization of social security (mandatory DC) • Negative cash and accrual yields • - Non-contributory poverty alleviation schemes

9. Welfare Impact • Fiscal objectives dominate reform design (in most cases) • Reducing the return on contributions >> on average, future pensioner receive less lifetime benefits for the same contributions or have to pay more for the same benefit • Changing internal redistributive features • All else is secondary in the policymaking process (transparency, financial sector development, etc). • Welfare impact needs distributional analyses • Fiscal neutrality requires compensating changes in the benefit distribution • “Welfare” itself is ambiguous: • Across stages of lifecycle • Present value terms vs. cash (as in the case of actuarially unfair retirement age increase) • Whose welfare: there is no average pensioner

10. Equity Impact • Equity is in the eye of the beholder • Horizontal equity: same IRR across the contribution distribution • Vertical equity: differentiated IRR across contribution distribution • Inter-generation equity: same (horizontal/vertical) equity features within the same cohort • Intra-generational equity: different equity features across cohorts • Not just theory: equity influences political and, therefore, fiscal sustainability • Higher contributions for same benefits >> eroding compliance • General revenue financed support to partial coverage scheme imply inequitable tax policy • Equity is perceptional: no generally applicable definition • Reforms change equity features: different impact on groups of different educational attainment, income and asset position, etc.

11. Any Learning? • Reforms need time to take effect • Grandfathering existing rights • Lead-time to adjust expectations • May need more then 10 years of continuing commitment (e.g. retirement age increase) • Policymakers may need to choose between fiscal sustainability, adequacy and equity • Not all systems and reforms are suitable for every country • Real risk: public/state pensions will be paid no matter what • There is no substitute for a well-informed and future-conscious public…. • - Relevant information rendered in an accessible manner • …but procedural and fiscal rules in policymaking can help.

12. Thank you! Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management