Transcript The European Pension Crisis

The European Pension Crisis
by
Estelle James
Two Europes
• First Europe has been unable to come to
grips with the pension crisis (France,
Belgium, Germany, Austria, Spain)-- PAYG,
unsustainable benefits, large IPD
• Second Europe has mandatory pre-funding
with private management + modest public
safety net (UK, Switzerland, Denmark,
Netherlands, Sweden, Poland, Hungary)
• We can learn what to avoid from first Europe
and where to go from second Europe
Basic demographics
• Populations old now, baby boomers retire
over next 20 years, increased longevity
• Support ratio (age 20-59/>60) will halve,
<2, everywhere. But policies will determine
impact of demographics. 2000
2030
–
–
–
–
–
France
Germany
Switzerland
US
Unwtd. Av.
2.7
2.5
2.9
3.4
2.8
1.6
1.2
1.3
1.7
1.5
•
•
•
•
Characteristics of pension plans
in first Europe
Generous replacement rates > 60%
Early retirement (< age 60)
Mandatory plan is 100% PAYG
Therefore high % of GDP & treasury spent
on pensions and health--may be inflationary
or crowd out other important public spending
• High IPD--above EU criteria if explicit
• Contribution rate > 25% in most countries, >
30% in some; will have to double in next 30
years if no changes--nonsustainable
Relationship Between Percentage of the Population
over 60 Years Old and Public Pension Spending
Pension spending as
percentage of GDP
16
Austria
Italy
Poland
Luxembourg
12
Greece
France
Sweden
Uruguay
U.K.
8
Panama
U.S.
Costa Rica
4
Israel
Japan
Australia
China
0
Jamaica
5
10
15
Percentage of population over 60 years old
20
Public Health and Pension Spending
versus Population Aging
Spending as a percentage of GDP
Austria
20
Czechoslovakia
Sweden
Poland
15
U.K.
New Zealand
Iceland
Canada
Switzerland
Spending on health and pension
10
Brazil
Trinidad &
Tobago
5
Japan
Australia
Cyprus
Spending on health
China
Jamaica
Swaziland
Zambia
S. Korea
Indonesia
0
0
5
10
15
20
Percentage of population over 60 years old
25
Implicit Public Pension Debt, 1990
Explicit debt
Canada
Implicit public pension debt
France
Germany
Italy
Japan
United States
0
50
100
150
200
250
300
Reliance on PAYG in first Europe
• Public plans are generous and fully PAYG-big burden on future generations, threatens
future fiscal stability, strength of euro
• Few private plans and those that exist aren’t
funded (PAYG in France, book reserves
Germany)--how will companies pay these
future debts in competitive market?
• Lack of funded private plans means few
institutional investors, weak financial
markets and corporate governance
• But difficult to shift to pre-funding while
paying off high IPD
Early retirement in first Europe
• Labor force participation rates of men over
age 55 has been falling rapidly:
– age 59: < 50% in Belgium, France, Italy
– 60-64: < 20% (>50% in US)
• DB plans, early retirement not penalized on
actuarially fair basis, drain on common pool
• Bad for system: more expense, less revenue
• Bad for economy: less experienced labor
• Considered antidote to unemployment but
may raise labor costs and unemployment
• But politically very difficult to raise
retirement age--shift to DC would help
Redistributions
• Large public plans are not redistributive to
poor--may pay higher lifetime benefits to
high earners
• Biggest gainers were those who retired in
past. Future retirees will get low rate of
return due to high contribution rate, high
dependency rate, uncertain benefits--losing
faith in system.
First Europe will have to change
• Will have to increase funding, shift to
partial DC, raise retirement age
• But difficult politically, very slow
• In 1990’s rate of growth half that in US,
unemployment double that in US
• Postponing increases problems--security for
pensioners, wage growth and employment
for workers
Second Europe: the way forward
• (1) UK, Switzerland, Denmark, Netherlands
(2) Sweden, Poland, Hungary--more recent
• These countries have modest public PAYB
pillars--redistributive: flat or compressed in (1),
earnings-related with minimum in (2)
• + (quasi) mandatory funded private 2d pillar
– group plan with investment manager chosen by
employer and/or union in (1)--historical reasons;
– but movement toward individual accounts in
some cases (UK, Switzerland)
– individual accounts with worker choice in (2)
Results:
• Lower projected public expenditures, IPD,
contribution rates; higher retirement ages
• Large build up of pension assets committed
for the long term; institutional investors,
corporate governance, financial instruments
• More secure pensions, healthier economies
• Protection for lower income groups
• If improves use of capital and labor, expands
size of pie, all generations can gain
Comparisons: unemployment rates
• Non-reformers
•
•
•
•
•
– 1994-97
Austria
5.3
Belgium 9.0
France
12.3
Germany 9.8
Spain
20.6
Reformers
1994-97
Australia
Denmark
Netherlands
Switzerland
UK
8.4
5.4
5.5
4.1
7.1
• Average 11.4%
6.1%
• UnE rate of non-reformers was almost double
that of reformers
• Source: World Bank, World Development Indicators, 2000
Comparisons: average annual
growth rates
•
•
•
•
•
• Non-reformers
• 1980-90 1990-8
Austria
2.2
1.9
Belgium 1.9
1.6
France
2.3
1.5
Germany 2.2
1.5
Spain
3.0
1.9
Reformers
1980-90 1990-8
Australia
3.4 3.8
Denmark
2.3 2.9
Netherlands
2.3 2.6
Switzerland
2.0 0.4
UK
3.2 2.9
• Average 2.3% 1.7%
2.6% 2.5%
• Non-reformers declined, reformers forged
ahead in 1990’s
• Source: World Bank, World Development Indicators, 2000
What do these tables tell us?
• Of course many policies besides pensions
are at work
• But pro-market, pro-competition, proefficiency policies seem to pay off--lower
unemployment, higher growth
• Social security reform with pre-funding and
private control of the funds is an important
part of that policy package
Lessons for the US?
• We can avoid problems of first Europe and
learn from second Europe
• The US already has a modest public pillar,
voluntary private plans
• But our public benefit is not sustainable; and
our private plans mainly cover upper 40%
• We can reform system while problem is still
manageable, and benefit economy at same
time (long term savings, later retirement)-this will keep retirement income secure, help
economic growth, potential gains for all