Projecting Pension Expenditure in Spain: On Uncertainty, Communication and Transparency

Transcription

1 Projecting Pension Expenditure in Spain: On Uncertainty, Communication and Transparency Rafael Doménech, Universidad de Valencia Ángel Melguizo, Servicio de Estudios BBVA XXXIII Simposio de Análisis Económico Zaragoza, 12 de Diciembre

2 Motivation Spanish pension system is particularly interesting for several reasons: in surplus since 1999, in contrast to previous projections, Spanish economy has benefit from an unpredicted supply shock, however, most projections predict one of the highest increases in public expenditure among EU countries due to ageing, the discussion about the challenges of the Spanish system has been less farreaching than in other European economies. 2

3 Motivation Figure 1. Knowledge about the pension contribution rate Italy Germany France Spain Correct Don't know / no answer Too low Too high Source: Boeri, Börsch-Supan and Tabellini (2001) The advances in the literature on the effects of ageing upon pension expenditures contrast with the lack of knowledge among non-specialists: even in basic issues (social contributions rate, PAYG functioning, etc.). 3

4 OUTLINE 1. Projection methodology. 2. Results. 3. Policy implications. 4. Concluding remarks. 4

5 Projection methodology Aggregate accounting. We opt for the aggregate accounting methodology (instead of life-cycle or general equilibrium models) based on its popularity (AWG, CBO) and simplicity. Public pensions expenditures over GDP can be decomposed as: pens G t pens pens pens Gt Lt Lt Lt 1 PL t t s PGDP t t Lt Lt Lt 1 ut GDP t Lt Take-up ratio: proxy of the pension system coverage (institutional rules). Old-age dependency ratio (demography). Employment rate: participation and unemployment (socio-economy). Benefit ratio: real average pension over productivity (institutional rules and macroeconomy). 5

6 Projection methodology Aggregate accounting: assumptions. Table 1. Main projection assumptions Demographic scenarios Demo 1 Eurostat (2008): Europop2008 zero immigration Demo 2 Eurostat (2008): Europop2008 Demo 3 Own elaboration, based on INE (2005) Socio-economic scenarios Macro 1 Constant participation rates from 2010 Constant unemployment rates from 2010 Macro Swedish participation rates in US unemployment rates in 2060 Macro Swedish participation rates in US unemployment rates in 2030 Institutional scenarios Institut 1 Pension increases over productivity (13%, as ) Institut 2 Constant benefit ratio from 2030 Institut 3 Pension decreases over productivity (-13%) Common assumptions Short-term macroeconomic scenario : Stability programme Cyclical economic and other uncertainty (+/- 0,4 p.p. approx.) Productivity growth: 1,5 per cent from 2015 Convergence to unitary take-up ratio in 2060 Constant social contributions over GDP from

7 Projection methodology Demographic trends. Table 1. Main projection assumptions Demographic scenarios Demo 1 Eurostat (2008): Europop2008 zero immigration Demo 2 Eurostat (2008): Europop2008 Demo 3 Own elaboration, based on INE (2005) Socio-economic scenarios Macro 1 Constant participation rates from 2010 Constant unemployment rates from 2010 Macro Swedish participation rates in US unemployment rates in 2060 Macro Swedish participation rates in US unemployment rates in 2030 Institutional scenarios Institut 1 Pension increases over productivity (13%, as ) Institut 2 Constant benefit ratio from 2030 Institut 3 Pension decreases over productivity (-13%) Common assumptions Short-term macroeconomic scenario : Stability programme Cyclical economic and other uncertainty (+/- 0,4 p.p. approx.) Productivity growth: 1,5 per cent from 2015 Convergence to unitary take-up ratio in 2060 Constant social contributions over GDP from 2006 Figure 3. Dependency ratio, (L+65/L16-64) 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0, Source: INE, Eurostat and own elaboration Demo1 Demo3 Demo2 We use three alternative demographic scenarios. Fertility, mortality and migration assumptions are summarized in the dependency ratio. 7

8 Projection methodology Macroeconomy: participation and unemployment rates. Table 1. Main projection assumptions Demographic scenarios Demo 1 Eurostat (2008): Europop2008 zero immigration Demo 2 Eurostat (2008): Europop2008 Demo 3 Own elaboration, based on INE (2005) Socio-economic scenarios Macro 1 Constant participation rates from 2010 Constant unemployment rates from 2010 Macro Swedish participation rates in US unemployment rates in 2060 Macro Swedish participation rates in US unemployment rates in 2030 Institutional scenarios Institut 1 Pension increases over productivity (13%, as ) Institut 2 Constant benefit ratio from 2030 Institut 3 Pension decreases over productivity (-13%) Common assumptions Short-term macroeconomic scenario : Stability programme Cyclical economic and other uncertainty (+/- 0,4 p.p. approx.) Productivity growth: 1,5 per cent from 2015 Convergence to unitary take-up ratio in 2060 Constant social contributions over GDP from 2006 Table A1. Main socio-economic assumptions Central scenario Participation rate Total 72,2% 75,6% 75,2% 79,7% Female 61,8% 66,9% 68,9% 77,6% Male 82,4% 84,0% 81,3% 81,8% Unemployment rate Total 8,3% 7,7% 6,5% 4,1% Female 11,4% 10,4% 8,1% 4,0% Male 6,1% 5,6% 5,1% 4,1% Source: INE and own elaboration We define three alternative economic scenarios. Participation and unemployment rates, by age and sex, in Spain are set constant from 2006, or converging with Nordic countries and US rates (in 2030 or 2060). 8

9 Projection methodology Institutions: coverage and pension level. Table 1. Main projection assumptions Demographic scenarios Demo 1 Eurostat (2008): Europop2008 zero immigration Demo 2 Eurostat (2008): Europop2008 Demo 3 Own elaboration, based on INE (2005) Socio-economic scenarios Macro 1 Constant participation rates from 2010 Constant unemployment rates from 2010 Macro Swedish participation rates in US unemployment rates in 2060 Macro Swedish participation rates in US unemployment rates in 2030 Institutional scenarios Institut 1 Pension increases over productivity (13%, as ) Institut 2 Constant benefit ratio from 2030 Institut 3 Pension decreases over productivity (-13%) Common assumptions Short-term macroeconomic scenario : Stability programme Cyclical economic and other uncertainty (+/- 0,4 p.p. approx.) Productivity growth: 1,5 per cent from 2015 Convergence to unitary take-up ratio in 2060 Constant social contributions over GDP from 2006 We use three alternative institutional scenarios, which differ in pension levels over productivity (increasing, constant or decreasing benefit ratio). Our approach is respectful with the main institutional features of the Spanish pension system (contributions, reserve fund, financing sources, pension categories). 9

10 OUTLINE 1. Projection methodology. 2. Results. 3. Policy implications. 4. Concluding remarks. 10

11 Results Main results: pension expenditure scenarios, Spain Table 2. Public pension expenditure projection, Expenditure Pensions / Workers Benefit ratio GDP share Take-up Dependency Employment rate ratio ratio (Gpens/P*Lpens) / Gpens/P*GDP Lpens / L Lpens / L+65 L+65/L16-64 L16-64/LS 1 / (1-u) (GDP/L) Central scenario ,6% 0,45 1,14 0,24 1,50 1,09 0, ,1% 0,46 1,11 0,27 1,46 1,08 0, ,7% 0,61 1,08 0,36 1,47 1,07 0, ,4% 0,87 1,04 0,56 1,42 1,06 0, ,3% 0,86 1,00 0,60 1,39 1,04 0,18 High expenditure scenario ,6% 0,45 1,14 0,24 1,50 1,09 0, ,7% 0,48 1,11 0,28 1,41 1,09 0, ,1% 0,71 1,08 0,41 1,48 1,09 0, ,7% 1,16 1,04 0,71 1,45 1,09 0, ,4% 1,16 1,00 0,74 1,45 1,09 0,19 Low expenditure scenario ,6% 0,45 1,14 0,24 1,50 1,09 0, ,3% 0,44 1,11 0,26 1,42 1,07 0, ,7% 0,53 1,08 0,34 1,39 1,04 0, ,2% 0,76 1,04 0,50 1,40 1,04 0, ,5% 0,79 1,00 0,53 1,42 1,04 0,16 11

12 Results Main results: pension expenditure scenarios, Spain Institutions: pension level Socio-economics: employment rate. Demography: dependency ratio. Within all the plausible assumptions, public pension expenditure in Spain will exceed contributions in the next 15 to 25 years. 12

13 Results Main results: pension expenditure scenarios, Spain Figure 6. Public pension expenditure projections (GDP share) 0,25 0,20 Balmaseda et al. (2006) Jimeno et al. (2008) High Present study 0,15 MTAS (2005) EPC (2006) Central Low 0,10 0,05 0, Initial year End year Results are in line with previous evidence, and robust to different methodologies. 13

14 OUTLINE 1. Projection methodology. 2. Results. 3. Policy implications. 4. Concluding remarks. 14

15 Policy implications Uncertainty, communication and transparency. 1. It should be stressed that these projections should not be done only when a reform is inevitable. Instead, they are meant to: - anticipate challenges, preventing problems hat may arise in the future, - simulate alternative reforms, to make people better-off, - increase the transparency of the pension system, in sum, they strength and reinforce the social safety nets. The biggest risk now facing Social Security is political. Should we consider modest reforms that reduce the expenses or widen the revenue base of Social Security? Sure. But beware of those who claim that we must destroy the system in order to save it. Paul Krugman, New York Times, May 3,

16 Policy implications Uncertainty, communication and transparency: indicators 2. It is of the utmost importance to agree on a set of indicators. They may display some characteristics (similar to those established in the fiscal rules literature): - Simplicity: easy to understand by the public opinion. - Transparency: reproducible. - Credibility: both of institutions and projections. - Publicity and periodicity: as a way to improve communication. 3. Communication will improve if indicators are accompanied by measures of the surrounding uncertainty (from assumptions or based on statistical methods). 16

17 Policy implications Uncertainty, communication and transparency: indicators Figure 9. Medium-term indicator (Central and high/low expenditure scenarios, GDP share) 0,14 0,70 0,12 Expenditure (left) 0,60 0,10 0,08 Social contributions (left) 0,50 0,40 0,06 0,30 0,04 Pension fund (right) 0,20 0,02 0,10 0, ,00 Medium-term indicator: will the system be in red? And, if that is the case, will the reserve fund be capable to finance it? 17

18 Policy implications Uncertainty, communication and transparency: indicators Figure 10. Long-term indicator (Central and high/low expenditure scenarios, GDP share, 2007 present value) 0,25 0,20 Expenditure 0,15 0,10 0,05 Revenues - -0,05-0,10 Balance -0, Long-term indicator: what is the actuarial imbalance of the system? And, how much should pensions or contributions be modified to close it? 18

19 Policy implications Uncertainty, communication and transparency: indicators Table 3. Summary indicators of the pension system (Central and high/low expenditure scenarios scenarios) High-expenditure Central Low-Expenditure Key facts Year Expenditure > Revenues Year Fund= Accumulated debt until 2060 (annual GDP share) -3,4% -1,6% 0,5% (2007 GDP share) -113,4% -66,2% 21,6% Necessary adjustment (from 2009) Revenues (annual) 1,4% 0,6% -0,2% Expenditure (annual) -1,1% -0,5% 0,1% A table summarizing this set of indicators should be published and discussed every year (as is done in the US, by the Trustees). 19

20 OUTLINE 1. Projection methodology. 2. Results. 3. Policy implications. 4. Concluding remarks. 20

21 Concluding remarks 1. There have been great advances in public pension projections, but some significant improvements remain to be done: - Dealing with uncertainty (stemming from demography, socio-economy and rules). - Improving communication (non-technical diffusion of the results). - Increasing transparency. 2. It should be stressed that pension projections are not made to dismantle the system, it is precisely the opposite: they are made to strength the system. 21

22 Concluding remarks 3. We have suggested a set of indicators about the future performance of the Spanish public pension system and a suitable method of representing their uncertainty (based on assumption ranges). - Simplicity: easy to understand by the public opinion. - Transparency: reproducible. - Credibility: both of institutions and projections. - Publicity and periodicity: as a way to improve communication. 4. Further work is needed: - Open and closed-group unfunded liabilities. - Agents behaviour. - Extension to other social expenditures. 22

23 Concluding remarks Figure 2. Opinions on pension reform before and after deliberations Bankrupcy in pension sysytem Raise retirement age Before After Before After Agree/Favour None Disagree/Oppose Source: Tomorrow's Europe Deliberative Poll (2007) Citizens demand information. Support for reforms, even among those who bear their short-term costs, significantly increases (or opposition decreases) with more information. Communication is crucial to implement reforms. 23

24 Projecting Pension Expenditure in Spain: On Uncertainty, Communication and Transparency Rafael Doménech, Universidad de Valencia Ángel Melguizo, Servicio de Estudios BBVA XXXIII Simposio de Análisis Económico Zaragoza, 12 de Diciembre

25 Annex Figure 7. Public pension expenditure and social contributions, (GDP share) 0,12 0,10 0,08 0,06 0,04 0,02 0, Old-age pensions Other pensions Social contributions Source: INE and Ministerio de Trabajo y Asuntos Sociales 25

26 Annex A backwards exercise ( ): what went right? Figure 8. Actual and projected pension expenditure, ( difference, GDP share) 0,020 0,015 0,010 0,005 0,000-0,005-0,010-0,015-0,020-0,025 Observed Barea et al. (1997) MTAS (1995) Herce and Pérez-Díaz (1995) Take-up ratio Dependency ratio Employment rate Benefit ratio Expenditure Deviations stem from a labour supply shock: lower than expected productivity growth (higher benefit ratio) and higher than expected employment rate. 26

27 Annex Ley de medidas en materia de Seguridad Social Principales contenidos e impactos Cotizaciones Gasto Cobertura Benefit ratio PENS / P>65 (PM/P) / (Y/N) Incapacidad Temporal Mayor control administrativo Incapacidad permanente Homogeneización regla de cálculo con jubilación Pensiones de jubilación Ampliación del número de días de cotización (de a 5.475) Criterios más estrictos para jubilación parcial 61 años (frente a 60) Más años de cotización (de 15 a 30) años en la empresa Mayor jornada mínima (de 15% a 25%) Mayores incentivos para la prolongación de vida laboral Pensión de viudedad Cobertura a parejas de hecho

28 Annex Fondo de reserva de la Seguridad Social (Millones de euros y % PIB) 5,0% 4,0% Dotaciones acumuladas Rendimientos acumulados Fondo (%PIB) ,0% ,0% ,0% ,0% Fuente: Ministerio de Trabajo y Asuntos Sociales 28

29 Annex Public pension expenditure projection, Expenditure Pensions / Workers Benefit ratio GDP share Take-up Dependency Employment ratio ratio rate (Gpens/P*Lpens) / Gpens/P*GDP Lpens / L Lpens / L+65 L+65/L / (1-u) (GDP/L) Doménech and Melguizo (2008) ,7% 0,43 1,11 0,25 1,56 0, ,1% 0,45 1,10 0,27 1,56 0, ,7% 0,58 1,05 0,36 1,52 0, ,4% 0,81 1,03 0,56 1,40 0, ,3% 0,80 1,01 0,60 1,32 0,19 MTIN (2008) ,3% 0,43 1,09 0,25 1,59 0, ,5% 0,43 1,07 0,27 1,52 0, ,3% 0,54 1,04 0,36 1,44 0, ,4% 0,76 0,98 0,56 1,39 0, ,1% 0,83 0,99 0,60 1,40 0,17 Difference (RDAM, MTIN, 2008) ,7% 0,00 0,02 0,00-0,02-0, ,4% 0,02 0,02 0,00 0,04-0, ,4% 0,03 0,01 0,00 0,08 0, ,1% 0,05 0,05 0,00 0,01 0, ,2% -0,04 0,02 0,00-0,08 0,02 29

30 Annex Expenditure and revenues over GDP 18,0% 16,0% 14,0% 12,0% 10,0% 8,0% 18,00 16,00 14,00 12,00 10,00 8,00 Reserve fund over GDP 15,00 13,00 11,00 9,00 7,00 5,00 3,00 6,0% 6, Gasto_RDAM Gasto_MTIN08 Ingreso_RDAM Ingreso_MTIN08 1,00-1, RDAM08 MTIN08 Summary indicators of the pension system RDAM (2008) MTIN (2008) Key facts Year Expenditure > Revenues Year Fund=