The European Dimension of Public and Private Pensions Prof. Axel Börsch-Supan , Ph.D .

1. MAX PLANCK INSTITUTE FOR SOCIAL LAW AND SOCIAL POLICY The European Dimension ofPublic and Private Pensions Prof. Axel Börsch-Supan, Ph.D. Munich Center forthe Economics ofAging (MEA) atthe Max-Planck-Institute forSocial Law andSocialPolicy BAVC, Prague, 04 June 2012

2. Outline Introduction: Pensions and the role of the Whitebook on pensions Structural differences in European pension systems Common problems and causes for reform in Europe Cures and policy responses in Europe Specific role of occupational pensions in Germany Conclusions 2

3. MAX-PLANCK-INSTITUT FÜR SOZIALRECHT UND SOZIALPOLITIK The EU Whitebook on Pensions Pension expenditures (% GDP)

4. MAX-PLANCK-INSTITUT FÜR SOZIALRECHT UND SOZIALPOLITIK Pension Expenditures (% GDP)

5. MAX-PLANCK-INSTITUT FÜR SOZIALRECHT UND SOZIALPOLITIK Pension expenditures and public debt explizit vs implicit debt [%GDP] 5

6. Outline Introduction: Pensions and the role of the Whitebook on pensions Structural differences in in European pension systems Common problems and causes for reform in Europe Cures and policy response in Europe Specific role of occupational pensions in Germany Conclusions 6

7. 2. Structure of Pension Systems in Europe 7

8. 2. Structure of Pension Systems in Europe 8

9. 2. Structure of Pension Systems in Europe 9

10. 2. Systemic differences in supplemental pensions Source: OECD Pensionsat a Glance 2011 10

11. Outline Introduction: Pensions and the role of the Whitebook on pensions Structural differences in in European pension systems Common problems and causes for reform in Europe Cures and policy response in Europe Specific role of occupational pensions in Germany Conclusions 11

12. 3a. Causes: Demography:Fertility, Longevity, Transition from Baby Boom to Baby Bust US 12

13. 3a. Causes: Demography

14. 3b. Causes: Design flaws (negative incentive effects) Source: Gruber & Wise 14

15. 3b. Causes: Design flaws (negative incentive effects) Source: Gruber & Wise 15

16. 3b. Causes: Design flaws (negative incentive effects) Example: Germany Source: Börsch-Supan & Schnabel 16

17. 3c. Design Flaws: Failing adequacy(even perverse redistribution) 17

18. Outline Introduction: Pensions and the role of the Whitebook on pensions Structural differences in in European pension systems Common problems and causes for reform in Europe Cures and policy responses in Europe Specific role of occupational pensions in Germany Conclusions 18

19. 4. Cures: work more, save more Simulation exercise: Alternative paths of living standards in “Old Europe” (=DE+FR+IT) Behavioral Source: Börsch-Supan and Ludwig (2009)

20. 4. Cures: Some recent reforms 20

21. 4a. Cures: Retirement Age (example: Germany) Counteracting:Minimum number of service years 21 Source: Berkel & Börsch-Supan

22. 4b. Cures: Shrinking PAYG systems • Increase basis for benefit calculation • Change indexation from wages to prices (or less) • NDC: Notional defined contribution system • QDC: Demographic or sustainability factors (life expectancy, system dependeny ratio) 22

23. 4b. Cures: Shrinking PAYG and expanding prefunded pillars (example: Germany) Supplementalpensions: 4% ofgrossearnings, 4.5% real return Supplementalpensions: 4% ofgrossearnings, 2.5% real return 23

24. 4c. Curing the problems: Targeting and redistribution • Separate macro issues (sustainability) from micro issues (“fixes” for selected groups) • Basic/minimum pension plus linear schedule • Nonlinear schedule (AIME/PIA conversion) • Political economy of reform 24

25. Outline Introduction: Pensions and the role of the Whitebook on pensions Structural differences in pension systems Common problems and causes for reform Cures and policy response Specific role of occupational pensions in Germany Conclusions 25

26. 5. Multipillarpension system

27. Contribution of pAV and bAVto expected old-age income 27

28. Uptake: Riester, bAV, other

29. Targetingbyhouseholdincome -all instruments higher for the wealthier -Riester especially high among low income

30. Riester: Lack ofknowledgeabouteligibilityforsubsidies Nach Einkommensquintil: 1 2 3 4&5

31. Can occupational pensions help? (a) reported participation 31

32. Can occupational pensions help? (b) subjective coverage 32

33. Causes again: lack of knowledge and transparency! 33

34. Lack of knowledge/transparency 34

35. 6. Conclusions: The European DimensionofPublic and Private Pensions Role of EU in public and private pensions: Large macroeconomic implications, especially for economic growth and financial stability Problems: Demography, design, poverty prevention Some relevant for EU at large, others country-specific Large differences in system design: No “one size fits all” EUpolicy Generally: “work more, save more” “Work more”has by far largest stabilizing impact, and relevant for all EU member states (but: DE vs. FR vs. DK/SE) “Save more”through pAV and bAV; very different approaches and philosophies in EU member states Still shockingly little knowledge about pAV and bAV Eligibility for RiesterpAV; contributions (thus claims) for bAV Multi-pillar systems: On the right path, but still much to do 35