Transcript A Comparison of Pension Reform in the EU – 27: What

“A Comparison of Pension Reform in the EU – 27:
What Lessons Can Be Learned?”
The Cicero Foundation
Paris, 10-11 May 2007
Mika Vidlund
Structure of the presentation

The need for pension reform – changing demographics

Pension reforms applied in the EU countries

How drastically do reforms affect the future pensions?

Concluding remarks
The change in old-age dependency ratio (65+/15-64) in the EU
countries
55
50
45
40
35
30
EU15
25
EU25
20
EU10
15
2005
2010
Source: Eurostat 2005
2015
2020
2025
2030
2035
2040
2045
2050
The change in old-age dependency ratio (65+/15-64) and the
situation in 2050
70
65
Elderly dependency ratio 2050, %
ES
IT
BG
60
EL
PT
DE
55
SI
CZ
AT
RO
50
BE
FR
UK
45
LV
EE
SE
40
DK
PL
SK
HU
FI
LT
IE
CY
MT
NL
LU
35
30
30
50
70
90
110
130
150
170
Percentual change of elderly dependency ratio 2004-2050, %
EU-25 average
Source: Eurostat
190
210
Public pension expenditure as a share of GDP between 2004 and 2050
14
13
12
% of GDP
11
10
9
8
7
6
5
4
2004 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source:EPC/AWG-calculations 2006
EU15
EU10
Public pension expenditure in the EU-25 countries in 2004 and in
2050, % of GDP
24
EL
22
PT
pension expenditure 2050, % of gdp
20
CY
SI
HU LU
18
16
14
DE
AT
12
ES
BE
FR
IT
FI
DK
CZ
NL
SE
10
IE
SK
LT
PL
8
UK
MT
6
LV
EE
4
2
-6
-4
-2
0
2
4
change by 2050, %-points
EU-25 average
Source: EPC/AWG-calculations 2006
6
8
10
12
14
Long-term (up to 2050) sustainability of public finances in the EU
Risk category
Country
Low-risk
DK, EE, LV, LT, AT, PL,
SK, FI, SE
Medium-risk
BE, DE, ES, FR, IE, IT,
LU, MT, NL, UK
High-risk
CZ, EL, CY, HU, PT, SI
Source: European Commission 2006
Financial sustainability of public pension systems according to synthesis
reports (2006 and 2003)
Joint Report 2006
“ No major challenges”
“Moderate challenges”
SE, UK
EE, LV
FI, DK, DE, IT, FR, IRL , NL, AT
LT, SK
”Important pressures”
BE
PL, MT
”Significant challenges”
ES, PT, EL, LU
CZ,CY, HU, SL
Joint Report 2003
”well prepared”
SE, UK
”manageable”
FI, DK, BE, IRL, NL, LU, PT
”further reforms needed”
IT, DE
”…indeed needed”
EL, ES, FR, AT
II: Pension reforms applied in the EU-27
countries
Not an easy task: reform of the pension systems

Path-dependency
-
- Institutional factors, structure of the pension system itself, is a decisive
precondition to the way reforms are enacted
- Pension systems are like elephants: large, grey, very popular but difficult to move
(Hinrichs 2000)
”Frozen welfare landscape” (Esping-Andersen 1996)

-
Continental/Corporatist welfare states most resistant to change
Earnings-related, generous benefits
Contributions are paid out of one’s own purse
Social partners have a decisive role – highly fragmented pension system
e.g. in France, Germany, Italy union consent has been decisive for previous
successful reforms
Some general trends among the variation of pension reforms

Tightening the link between contributions and benefits
- Most visible in Italy and Sweden, likewise in Poland and Latvia
- Countries with DB scheme: no more ”best years” or ”last years” principles

Implementation of individual pension accounts
- Widely adopted especially in EU12 countries

Establishment of various sustainability factors or demographic factors

Changes in pension indexation rules
- Cost of living index instead of wage index or increased weight of the inflation component in a
mixed indexing formula or lower adjustment by incorporating parametric component in the
formula (as ”sustainability factors” in Sweden and Germany)

Measures aiming at raising the effective retirement age
- abolition of early retirement pathways, raising the retirement age or making it flexible

Prefunding of pensions
Value of pension assets in the EU countries in 2004,
per cent of GDP
% 140
120
II pillar
I pillar
100
80
60
40
20
0
NL DK SE UK FI IE CY LU SK BE PT ES FR PL DE AT HU CZ IT EE SI LV LT
Source: AWG (2006); EFRP 2005; OECD 2005
In the EU-15 countries the majority of pension reforms can be
labelled parametric. However…

Parametric reforms can be a crucial precursor for a more far-reaching
paradigmatic reform as they change the liabilities under the old system
and may thus pave the way for smoother transition to a new system
and benefit structure (Holzmann et al., 2005; Hinrichs & Kangas, 2003)

A new kind of interplay between public and private pension systems
can be found in some countries when studying the issue more deeply.
An example from Germany

Germany:
- the pension reform in 2001 with the introduction of a voluntary
pension saving scheme (so-called Riester pension) has been described
as a path-breaking law which will over time substantially alter the
institutional logic of the pension system (Hinrichs 2002, 2004 and 2005;
Lamping & Rüb, 2004; Schmähl, 2004; Börsch-Supan & Wilke, 2006)
- movement towards a new kind of public-private mix has further been
strengthened by 2004 reforms with introduction of a sustainability factor
slowing the pensions adjustment as well as establishment of target
values for the contribution rate
An example from France

-
-
France
According to Palier (2000), governments in France have long preferred
to increase social contributions than to cut benefits.
Parametric changes. However, with the reform of 2003 a link between
the level of pension and average life expectancy was established.
Lengthening the period required for a full pension in pace with average
life expectancy and especially the use of price indexation in both basic
and supplementary systems decrease significantly the future pension
level.
Market based approach in UK and Ireland

UK:
- Opting out system. The attractiveness to opt out was raised by parametric
reforms in 1986
- stakeholder pensions 2001
- SERPS was replaced by S2P in 2002 (MIG, Pension Credit)
- Plans for moving the S2P towards a flat-rate scheme
- New scheme of personal accounts in the near future?

Ireland:
Flat-rate statutory pension system
PRSA were introduced in 2002
The government has raised the basic pension significantly
-
 Twofold pension strategy: the target is to shift pension provision to the
private schemes while guaranteeing adequate incomes for the poorest
pensioners
Path-breaking reforms in Sweden and Italy

Italy established NDC reform in 1995 and Sweden in 1999

In Sweden fully funded individual pension accounts

Italy is also launching individual pension accounts through the new TFR
system starting from 2008

Changeover to the new system in Italy will be much slower and
changes in life expectancy will not be taken into account annually but
only after discussions once every 10 years
Multipillar reforms in the new EU countries



Several new Member States play an important role as “testing ground”
for the ’second pillar’ pension reform
Also ”newcomers” have adopted mandatory individual pension
accounts (2nd pillar)
- Romania in 2006; contributions to the private savings accounts to
begin in 2008
- In Bulgaria a new system consisting of 2nd pillar individual accounts
was implemented in January 2002
Individual pension account component much larger in the new EU
countries than in Sweden
III: How drastically do reforms affect the future pensions?
Theoretical gross pension replacement rates in the EU-15 countries
in 2005 and projected for 2050, %
80
60
40
20
UK
IE
FI
SE
DK
DE
FR
Public pensions
BE
LU
NL
AT
Occupational pension (II-pillar)
IT
PT
ES
2050
2005
2005
2050
2050
2005
2005
2050
2050
2050
2005
2005
2005
2050
2050
2005
2005
2050
2050
2050
2005
2005
2005
2050
2050
2005
2005
2050
2050
0
2005
% of average earnings
100
EL
Theoretical gross pension replacement rates in the EU-10 countries
in 2005 and projected for 2050, %
80
60
40
20
CZ
EE
CY
LV
Public pensions
LT
HU
MT
Occupational pension (II-pillar)
PL
SI
SK
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
0
2005
% of average earnings
100
What lessons can be learned?






There is no single roadmap, no “one size fits all,” what comes to pension reform.
Institutions do matter – continuity in pension policy is a visible phenomenon when
countries develop their pension systems
However not even traditional Bismarckian countries have stayed intact – substantial
changes come as a result of incremental steps
In many countries the income composition of the retiree will change – towards
multipillar approach, shift of reliance to ”new players”
Defined-contribution savings accounts are high on the pension reform agenda.
However, a range of variation in the role of the state, individual’s freedom of choice,
the provision of minimum pensions, overall coverage, regulation, investment rules and
benefit guarantees
Pension reform policy is a ”never-ending story”
EU can afford to grow old

According to EPC/AWG report 2006:
-
There are grounds for being optimistic that the EU can afford to grow
old. Reforms work and many EU countries have made real progress
in recent years
-
Ageing pushes up spending in the coming decades. However, other
factors such as increase in the employment rate, tightened eligibility
rates and declining relative benefit level will offset part of the
demographic pressure.
-
In the EU15, these factors are projected to curtail some 70% of the
pressure caused by demographic developments alone, and in the
EU10 they would offset almost all the demographic pressure.