Transcript Equity Analysis for Pensions (Social Insurance)

Equity Analysis for
Pensions (Social Insurance)
Anita M. Schwarz
ECSHD
May 2006
Objectives of a Pension
System
Reduce poverty among the elderly
 Smooth consumption between working
years and retirement years

– Implication: those who earn and consume more in
working years will consume and earn more in retirement
years
– Very different from other public expenditure programs
which ideally would be designed to allocate equal or
greater share of expenditures to the poor
Example from OECD countries,
Pensions at a Glance
2
Canada
1.5
Germany
1
Ireland
0.5
Japan
0
Wage Relative to Average Wage
3
2.7
2.4
2.1
1.8
1.5
1.2
0.9
New Zealand
0.6
0.3
Pension Relative to Average
Wage
Countries with Highly Redistributive Benefits
United Kingdom
United States
Pensions at a Glance
Pension Relative to Average
Wage
Countries where Pensions are Closely Linked to Contributions
2.5
2
1.5
Finland
France
1
0.5
0
0.3
Italy
Netherlands
5
5
.
0
0.8
5
0
.
1
1.3
5
5
.
1
1.8
5
0
.
2
2.3
Wage Relative to Average Wage
5
5
.
2
2.8
Pensions Based on
Contributions
Coverage limited to those who pay; benefits
based on level and duration of contributions
 Less than 50% of the labor force is paying
contributions – likelihood of paying goes up
with income
 Unsurprisingly, expenditures go to higher
income groups

Important Redistributions
Nonetheless
Redistribution from those outside the
system to those within when there are fiscal
deficits
 Redistribution across generations – younger
cohorts pay more with aging of the
population
 Redistribution within covered cohort

– Progressive benefit formula
– Minimum pension
Fiscal Sustainability
Deficit as % of GDP
Deficits in Turkish Pension Systems
(2.0%20)0
4
11 018 025
0
2
2
2
32 039
0
2
2
46 053
0
2
2
(4.0% )
60 067
0
2
2
74
0
2
Base Case
(6.0% )
(8.0% )
Years
Fiscal Sustainability
 Someone
has to pay the future
pensioners
– Either paid from outside the system
– Partial default due to rules change
 Redistribution
from outside the system
to within
 Intergenerational equity
Equity within a Cohort
Women's Pensions Relative to Pre-Retirement Wage
Internal Rates of Return for Different Women
% rate of interest
7
6
5
High income
4
Average Income
3
Low income
2
1
0
Pre-Reform PAYGfemale
Female
Current
Female
FutureFemale
90
80
70
60
50
40
30
20
10
0
High Income
Avg Income
Low Income
Pre-Reform
Female
PAYGfemale Current Female FutureFemale
Sometimes Need to Look
Beyond Pension System for
Intracohort Equity
 Sometimes
means-tested pension
benefits available in addition to
contributory
 Sometimes basic benefits available to
all
 Sometime pensioners eligible for same
social assistance as other age groups
Tools

PROST model:
– Fiscal analysis


SR and LR sustainability
Implicit pension debt
– Individual level social analysis




Vary starting age, retirement age, starting wage, wage
growth, work history, and mortality experience
Pensions as percentage of economy wide wage
Pensions as percentage of own final salary
Internal rate of return provided by pension system