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Pensions at a Glance 2011

Pensions at a Glance 2011. Anna Cristina D’Addio & Andrew Reilly Social Policy Division OECD. Agenda. Brief history of the project Methodology Structure of pension systems Assumptions Results. Brief history of the project. Project history. Pensions at Glance 30 OECD countries

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Pensions at a Glance 2011

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  1. Pensions at a Glance 2011 Anna Cristina D’Addio & Andrew Reilly Social Policy Division OECD

  2. Agenda • Brief history of the project • Methodology • Structure of pension systems • Assumptions • Results

  3. Brief history of the project

  4. Project history • Pensions at Glance • 30 OECD countries • 2005

  5. Project history • Pensions at Glance • 30 OECD countries • 2005 • Pensions Panorama • 53 countries • 2006

  6. Project history • Pensions at Glance • 30 OECD countries • 2005 • 2007 • Pensions Panorama • 53 countries • 2006

  7. Project history • Pensions at Glance • 30 OECD countries • 2005 • 2007 • 2009 • Pensions Panorama • 53 countries • 2006

  8. Project history • Pensions at Glance • 30 OECD countries • 2005 • 2007 • 2009 • 2011 (42 countries) • Pensions Panorama • 53 countries • 2006

  9. Methodology

  10. 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

  11. Comparing pension systems • Fiscal approach: • deals with aggregate pension expenditure but silent on their distribution among individuals • Institutional approach: • far too easy to get bogged down in details and miss key differences • Income-distribution analysis: • backward looking

  12. A microeconcomic approach • Model of pension entitlements at individual level • Goal: indicators for cross-country monitoring pension systems • Consistent across a broad range of countries • Covers all mandatory pensions • Includes effect of income tax and social security contributions

  13. Structure of pension systems

  14. Retirement - income system First tier Second Tier Third Tier Mandatory, adequacy Mandatory, savings Voluntary, savings Basic Public Private Private Resource - tested/ Defined benefit Defined benefit Defined benefit social assistance Minimum pension Defined Defined Points (second tier) contribution contribution Notional accounts Taxonomy of pension schemes

  15. Retirement - income system First tier Second Tier Third Tier Mandatory, adequacy Mandatory, savings Voluntary, savings Basic Public Private Private Resource - tested/ Defined benefit Defined benefit Defined benefit social assistance Minimum pension Defined Defined Points (second tier) contribution contribution Notional accounts Taxonomy of pension schemes

  16. Retirement - income system First tier Second Tier Third Tier Mandatory, adequacy Mandatory, savings Voluntary, savings Basic Public Private Private Resource - tested/ Defined benefit Defined benefit Defined benefit social assistance Minimum pension Defined Defined Points (second tier) contribution contribution Notional accounts Taxonomy of pension schemes

  17. Retirement - income system First tier Second Tier Third Tier Mandatory, adequacy Mandatory, savings Voluntary, savings Basic Public Private Private Resource - tested/ Defined benefit Defined benefit Defined benefit social assistance Minimum pension Defined Defined Points (second tier) contribution contribution Notional accounts Taxonomy of pension schemes

  18. Retirement - income system First tier Second Tier Third Tier Mandatory, adequacy Mandatory, savings Voluntary, savings Basic Public Private Private Resource - tested/ Defined benefit Defined benefit Defined benefit social assistance Minimum pension Defined Defined Points (second tier) contribution contribution Notional accounts Taxonomy of pension schemes

  19. Assumptions

  20. Key assumptions • Full-career workers • contribute every year from age 20 (or standard entry age) to normal pension eligibility age • Across the earnings range (0.5 to 2.0 times average) • Forward looking: all legislated reforms fully in place • ‘steady-state’ assumption • new labour-market entrants • Standard macroeconomic and financial assumptions • earnings growth, real rate of return (on funded pensions), discount rate (for actuarial calculations), mortality rates: projections for 2050

  21. Results

  22. What’s new? • More countries • four new OECD members • other G20 economies (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia, South Africa, EU27) • More indicators • Five special chapters • pensionable age and life expectancy, 1950-2050 • trends in retirement and in working at older ages • pension incentives to retire • helping older workers find and retain jobs • linking pensions to life expectancy

  23. Agenda: four key objectives and principles • Financial sustainability • Work incentives • Security in the face of risk and uncertainty • Benefit adequacy and coverage

  24. 1 Financial sustainability

  25. Italy France Austria Greece Poland Portugal Hungary Germany Finland Belgium Slovenia Sweden Denmark Norway Average Luxembourg Spain Bulgaria Czech Republic C hange Malta 2007 - 2060 Slovak Republic Lithuania L evel United Kingdom in 2007 Romania Netherlands Cyprus Estonia Latvia Ireland 0 5 10 15 20 25 Public pension spending Public expenditure on old-age and survivors’ benefits, per cent of GDP

  26. Demographic (in)determinism Public expenditure on pensions, per cent of GDP 25 20 2010 R2=0.586 15 Italy France Austria Poland Germany 10 Norway Sweden Turkey Netherlands United Kingdom, Estonia, Switzerland 5 Ireland Canada, New Zealand, United States, Australia Mexico 0 Korea 0 10 20 30 40 50 60 70 Dependency ratio: percentage of adult population aged 65+

  27. Demographic (in)determinism Public expenditure on pensions, per cent of GDP 25 20 2010 R2=0.586 15 10 5 0 0 10 20 30 40 50 60 70 Dependency ratio: percentage of adult population aged 65+

  28. Demographic (in)determinism Public expenditure on pensions, per cent of GDP 25 Greece Luxembourg 20 Slovenia 2010 R2=0.586 Spain Belgium Italy 15 Norway Portugal Germany Turkey 10 Poland United Kingdom Canada Korea United States 5 Australia 2050 R2=0.112 Mexico 0 0 10 20 30 40 50 60 70 Dependency ratio: percentage of adult population aged 65+

  29. 2 Work incentives

  30. Trends in pensionable ages Pensionableage, OECD average, years 65 Low point Today 64 Men 63 62 Women 61 60 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

  31. Normal pension age: long-term rules Number of OECD-34 countries 25 AUT BEL 20 CAN CHL (60F) CZR FIN GRC 15 HUN IRE ITA (60F) JPN KOR 10 LUX MEX NLD AUS NZL POL (60F) DNK 5 PRT DEU ESP ISL SWE ISR FRA EST CHE (64F) NOR SVK SVN TUR USA GBR 0 61 62 63 64 65 66 67 68 69 70 Normal pensionable age, years

  32. Pension incentives to work/retire • Change in pension wealth from working an additional year • age 60-65: main retirement window • express as proportion of individual earnings: implicit tax or subsidy

  33. Pension incentives to work/retire

  34. Pension incentives to work/retire • Change in pension wealth from working an additional year • age 60-65: main retirement window • express as proportion of individual earnings: implicit tax or subsidy • Level of pension wealth already accrued • at age 60: beginning of retirement window • express as a multiple of individual earnings

  35. Retirement incentives summary

  36. 3 Security

  37. Diversification • Pay-as-you-go public pensions: • sustainable rate of return = earnings growth + employment growth • Funded pensions • rate of return in capital market directly or indirectly affects pension value • Think of pension package as a ‘portfolio’ of different ‘assets’

  38. Incomes in old age

  39. Balance between public and private provision of mandatory pensionsPercentage of weighted average pension wealth Weighted average pension entitlements, new entrants in 2008, per cent of total

  40. Pension assets Netherlands Iceland Switzerland Australia United Kingdom United States Chile Canada Ireland Denmark Japan Poland Portugal Private Hungary New Zealand Spain Mexico Sweden Norway Germany Slovak Republic Italy France 0 25 50 75 100 125

  41. Pension assets Netherlands Finland Iceland Sweden Switzerland Australia Japan United Kingdom United States United States Chile Ireland Canada Canada Ireland Denmark New Zealand Japan Poland Australia Portugal Private Public Portugal Hungary New Zealand Government bonds and bills Spain Spain Belgium Mexico Other investments Sweden Norway Norway France Germany Slovak Republic United Kingdom Italy Poland France 0 25 50 75 100 125 0 25 50 75 100

  42. 4 Adequacy and coverage

  43. What is adequacy? • Narrow definition: absolute standard of living • Broad definition: relative standard of living • Analytical tools: • income-distribution data • simulation of pension entitlements

  44. Income poverty Old-age poverty rate, per cent 35 IRL 30 MEX AUS 25 GRC USA JPN 20 Old more likely CHE ESP to be poor PRT 15 FIN BEL ITA TUR DNK Old less likely NOR 10 GBR DEU FRA to be poor SWE AUT SVK CAN 5 ISL POL LUX HUN NZL CZE NLD 0 0 5 10 15 20 Population poverty rate, per cent

  45. Safety nets (benefits level)

  46. Future (mandatory) replacement rates Net replacement rate, per cent 125 Average earner 100 75 50 25 0 MEX JPN NZL USA CAN EST FRA BEL CHL FIN OECD SVK ISR SVN AUT LUX ISL GRC IRL GBR KOR SWE DEU AUS NOR CHE CZE POL PRT ITA ESP DNK TUR NLD HUN

  47. Future (mandatory) replacement rates 125 Net replacement rate, per cent Average earner 100 75 50 25 0 MEX JPN NZL USA CAN EST FRA BEL CHL FIN OECD SVK ISR SVN AUT LUX ISL GRC IRL GBR KOR SWE DEU AUS NOR CHE CZE POL PRT ITA ESP DNK TUR NLD HUN Net replacement rate, per cent 125 Low earner (50% of average) 100 75 50 25 0 JPN MEX USA GBR SVK KOR EST CHL CHE NOR ESP SVN CAN CZE ISR NLD GRC ISL DEU IRL SWE POL FRA FIN PRT ITA NZL BEL AUS OECD AUT HUN LUX TUR DNK

  48. Coverage of private pensions Sweden Switzerland Denmark Netherlands Australia Norway Germany Poland Canada United Kingdom Czech Republic United States Hungary New Zealand Belgium Ireland Quasi-mandatory Slovak Republic Mandatory Finland Voluntary Spain Italy France Portugal 0 10 20 30 40 50 60 70 80 Percentage of working-age population

  49. 5 Conclusions

  50. General policy direction • Balancing objectives of benefit adequacy and financial sustainability • challenges of crisis and ageing • need to achieve both • Improving the terms of the trade off • working longer • private pensions • targeting

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