Public pension reform in Europe

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Public pension reform in Europe
DWP PUBLIC POLICY SEMINAR ON AGEING AND
PENSIONS Feb 5, 2004

• Richard Disney
• University of Nottingham
• Institute for Fiscal Studies

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Topics in the presentation

• The state of European public pension programmes
• Reform strategies
• Are there lessons for the UK?

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The basic facts

• Europes 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

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Note derived by author using PAYG rule that c
RR/support ratio
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But projections of rising pension costs in
future.
Note These are EC standardised projections
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The good news employment rates of older workers
are rising
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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)

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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

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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

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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

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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

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Cons of actuarial reforms

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

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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 govts budget constraint)
• (Example Kotlikoff on US trust fund buying govt
  securities)

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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 rgtg?)

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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!

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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.

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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
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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)