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Explore the evolving landscape of European pension reforms, focusing on key issues, recent developments, and the impact on labor markets and retirement prospects. Gain insights into adjustments needed, demographic trends, and the drive to promote longer working lives.
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European pension reforms Master PPD 13 /02 / 2009 Olivier Bontout - DREES Ministry of labour, family and solidarity, Ministry of health, youth and sports, Ministry of budget and public accounts
Pension reforms General framework A common challenge Main developments in current reforms Recent developments : labour market and pension prospects Some outstanding issues European approach - OMC
I – General framework • Broad meaning • Definitions • Organisation
Broad meaning • Face major life risks • Distribution of risks • Not only poverty relief in old age but also income replacement function
EU 25 Total Government expenditures (including interests) 49,0 Total Social Protection 26,8 Old age and survivors benefits 12,3 Sickness, health care 7,6 Unemployment (including ALMP) 1,8 Disability 2,1 Family and children 2,1 Housing, social exclusion n.e.c. 0,9 Size of government expenditures in 2003 (%GDP) Source Eusrostat; New Cronos and ESSPROS
Social protection expenditures in 2003 (by function) Data for Cyprus are not available. Source Eusrostat; New Cronos and ESSPROS
Definitions • Funded vs. unfunded (PAYG) • Reserves… • Defined benefit (DB) vs. defined contribution (DC) • NDC…
Organization of pension systems • Public – Social security General and mandatory • Earnings related or flat rate • Minimum income provision - within general pension schemes - separate targeted benefits • Supplementary provision • Occupational (linked to employer) • Voluntary
Future tax-payers Adjustments - three generations Current tax payers Current retirees
Adjusments - three channels Adjusting benefits Action on tax and contributions (including collection) Working longer, Increasing retirement ages
II - A common pension challenge: adjustments needed Increase in life expectancy and dependency ratios Decline in effective retirement ages … reversal in recent years Contribution rates – further increases ?
Life expectancy at 60 and activity rates 55-64 Source Eurostat for Life expectancy and ILO (ES and SE 1970-2000, FR 1968-2000 , IT 1971-2000, UK 1971-1991)
1960 1980 1990 2004 2025 2050 Ratio population 60+ /20-59 28% 33% 35% 39% 58% 80% Ratio population 65+ /20-64 15% 21% 23% 27% 39% 58% Ratio population 70+ /20-69 / / 14% 18% 25% 40% Trends in dependency ratios Note : EU25. Source : Eurostat 2005 demographic projections.
Demographic trends : EU12 more affected, in particular after 2020 and 2040 Source : Eurostat 2008 demographic projections.
A common challenge All systems are concerned: DB, DC, NDC, PAYG, funded, European States are not interdependent: public finance, mobility, common social rights and objectives,
III - Key elements arising from current pension reforms Strengthening incentives for working longer Developing a life-cycle approach and strengthening the link between contributions and benefits while reducing access to early paths out of employment
Key elements arising from current pension reforms (2) Making pension systems more adaptable to structural changes in society Develop secure private pensions complementing and partially replacing public pension provision
IV – Recent developments Labour market – a recent reversal Benefits – the key challenge of working longer Private pensions
Employment of older workers : a huge potential of progress Recent improvements, but still huge potential Still decreasing employment rate from age 55 Most transitions from employment to pensions are not direct
Recent increases of employment of older workers Source : LFS
The key role of promoting longer working lives Employment rates of older workers : some signs of divergence Between States : divergence Between genders : slow convergence Between qualifications : divergence
Non convergence between MSs? Average standard deviation of employment rates 55-64 and 25-54 Source : LFS – Note : Total for all Member States available , EU* for a group of Member States where are available all the period long (BE, DK, DE, IE, EL, FR, IT, LU, NL, UK) -30- 30 Commission européenne
Slow convergence between Genders ? Employment rates by gender for 55-64 in EU -31- 31 Commission européenne
Divergence between skill levels? Employment rate of men 55-64 in EU25 -32- 32 Commission européenne
Projected long term trends • Adequacy : theoretical replacement rates • Sustainability : expenditures projections -33- 33 Commission européenne
The key role of promoting longer working lives Longer working lives strongly impacts on : adequacy – on individual replacement rates compensation for declines induced by ongoing reforms (ISG-OECD theoretical replacement rates) sustainability – on future expenditures compensation for demographic pressure and decline of average benefit ratio (AWG projections)
Trend of replacement rates : effect of enacted reforms at a given retirement age 2005-2050 A trend toward a decline in most statutory schemes Source : Stylised illustration from ISG results on gross replacement rates
How to compensate for this decline ? Working longer and private pensions Source : Stylised illustration from ISG results on gross replacement rates
Trends of future pension expenditures Source : AWG projections
Decomposition of trends of public pension expenditures (2004-2050) Source : AWG projections
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Private pensions vs state pensions: voluntary or mandatory DB or DC schemes, individual or occupational offered by companies exclusively or with some role played by the state. The risk is shifted from the state to individuals/employers/private companies. Development of private pensions
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 An expected increase of the contribution of privately managed schemes to the income of retired people But public PAYG pension schemes are expected to remain the principal source of income of pensioners in all but a few Member States The role of private and supplementary pensions in the EU
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Coverage (% of the workforce) Low (<10%) Medium (between 10% and 50%) High (between 50% and 90%) Very high (> 90%) Average contribution to the income of retired people Low or negligible (<10%) EL FR IT CZ ES LV LT LU AT SK BE EE HU PL SI Medium (between 10% and 25%) FI PT DE IE SE High (> 25%) UK DK NL Very high (More or around 50%) Current situation
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Current situation and expected evolution in selected countries
V - Some key issues • Concerns about equity and poverty • Compulsion vs. incentives : private pensions and working longer • How to fully restore social and financial sustainability ? -43- 43 Commission européenne
Key issues (1) • Concerns about equity and poverty • Risks related to inadequate pension provision • A revival of minimum income provision -44- 44 Commission européenne
Projected evolutions : adequacy and sustainability Source : Stylised illustration from ISG and AWG results (public pension schemes include the funded tier of statutory schemes)
How to strengthen the role of minimum pensions and solidarity in pension systems ? • Poverty risk among elderly remains generally higher than overall population • Links between level of benefits, degree of means-test, incentives and indexation rules • A need for appropriate monitoring tools -46- 46 Commission européenne
Poverty risk among elderly Source Eurostat, income data -47- 47 Commission européenne
Theoretical replacement rates : effect of indexation 10 years after retirement (2005-2015) Source : ISG results on gross replacement rates
Key issues (2) • Compulsion vs. incentives : private pensions and working longer • Working longer : choice, incentives for earlier / deferred retirement, partial retirement • Private pensions : incentives and coverage -49- 49 Commission européenne
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Coverage and solidarity • Fiscal incentives : efficiency, costs and equity issues • Risk sharing Transparency and portability Information and financial literature • Admin charges • Security Private pensions – key issues