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Public pension reform in Europe

DWP: PUBLIC POLICY SEMINAR ON AGEING AND PENSIONS Feb 5, 2004. Public pension reform in Europe. Richard Disney University of Nottingham & Institute for Fiscal Studies. Topics in the presentation. The state of European public pension programmes Reform strategies

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Public pension reform in Europe

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  1. DWP: PUBLIC POLICY SEMINAR ON AGEING AND PENSIONS Feb 5, 2004 Public pension reform in Europe Richard Disney University of Nottingham & Institute for Fiscal Studies

  2. Topics in the presentation • The state of European public pension programmes • Reform strategies • Are there lessons for the UK?

  3. The basic facts • Europe’s population is ageing • Pension costs are rising • Rising dependency ratios have been offset by increased participation of baby boomers (esp. of women) • In many countries, greater generosity (benefit levels, early retirement) lies behind increasing pension costs • In the future, old age dependency will become the key driver

  4. Note: derived by author using PAYG ‘rule’ that c* = RR/support ratio

  5. But projections of rising pension costs in future…. Note: These are EC standardised projections

  6. The good news: employment rates of older workers are rising

  7. Classifications of public pension programmes • Single pillar v. multi-pillar (World Bank) • ‘Beveridge’ v. ‘Bismarck’ • Extent of public v. private provision • Extent of ‘actuarial fairness’ in programme (esp. of public component)

  8. Reform strategies (not exclusive) • ‘Parametric’ reforms (IMF jargon) • e.g. less generous indexation, Italy 1992 • Greater ‘actuarial fairness’ in public programme • e.g. Italy 1995, Sweden, new German proposals • ‘Top up’ funded component or prefunded public component • e.g like US Trust Fund; various proposals from France, Ireland etc • Greater selectivity (UK) • Fixing up retirement incentives

  9. ‘Parametric reforms’ • IMF (Chand & Jaeger, 1996) • Designed to restore fiscal stability • Cutbacks in generosity • Political credibility – how to stop backsliding? • Likely to affect existing pensioners as well as future pensioners

  10. ‘Actuarial-based reforms’ • Goes to back to ‘point systems’ used in France & Germany • Reconstitute pension claims as ‘notional accounts’ (Sweden, Italy) • Contributions earn a sustainable ‘return’ (‘Aaron-Samuelson condition’) • Indexation of key parameters (longevity, growth of accrued rights, indexation) to ‘sustainability’ indicators

  11. Pros of ‘actuarial reforms’ • Gets rid of ad hoc nature of ‘parametric’ reforms • Return on contributions transparent (willingness to pay /improve incentives?) • Guarantees long run sustainability, if properly implemented

  12. ‘Cons’ of actuarial reforms • Does not guarantee short run sustainability? • If ‘actuarial fairness’ the key, why not introduce funding (especially if r > g)? • Rarely fully implemented e.g. Italy first age of retirement not indexed to longevity, also what happens if g < inflation? • Long transition to steady state (e.g. Italy 2040 – but then transition SERPS to S2P no better!)

  13. Pre-funding? • Follow US example – accumulate ‘trust fund’ for when baby boomers retire • Proposed in Ireland, France, elsewhere… • Main problem – can trust fund be ring-fenced (otherwise softens the govt’s budget constraint) • (Example: Kotlikoff on US trust fund buying govt securities)

  14. Top-up funding? • Attempts to establish a funded ‘pillar’ over and above reformed public programme • Examples: Germany, Italy, Sweden • How to start from scratch? (Additional contributions on already high level) • Find existing ‘pot’ and convert to pension fund? (Italy and TFRs) • Divert contributions to funded component (e.g Sweden, but what happens if r>g?)

  15. Greater selectivity? • Only UK seems to follow this road with break between BSP and MIG/RTC • Australia is obvious comparator – pure ‘tax and transfer’ plus mandatory saving • Without mandatory saving, clear disincentives to save (wrong to say RTC has ‘less disincentives’ than MIG given more people affected) • But mandatory saving is then implemented because people have no incentive to save!

  16. ‘Fixing up’ retirement incentives • Many countries allow generous ‘early retirement’ provisions (in public programme) • And implement retirement tests on workers • Moves to have latter abolished e.g. US, partially, 2000 • UK looks OK by this criterion – Disney & Smith (2002) estimate 1989 abolition of ‘earnings rule’ had small +ve impact on hours.

  17. MIG v. Pension Credit: Impact on incentives? Post-benefit income Pension Credit Minimum Income Guarantee PC v MIG ? PC v MIG ? PC v. MIG ? Basic state pension Pre-benefit income

  18. Lesson for UK? • We can discuss, but…. • UK has gone its own way (much more funding, greater selectivity of public programme • Methods of indexation (e.g. retirement age to longevity, pensions-in-payment neither to prices or earnings) are of interest • UK programme has become exceptionally complex – some efforts elsewhere to simplify (but multi-pillar will always be more complex…)

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