The 2015 Pension Adequacy Report:

Transcription

1 The 2015 Pension Adequacy Report: The weigth of working-careers in future pension adequacy Identifying ways of raising effective retirement ages Bruxelles 12 May 2016 Fritz von Nordheim Nielsen European Commission DG EMPL, C2: Social Protection Systems

2 2015 Pension Adequacy Report Developed for SPC by WG-AGE & Commission Service Published in two volumes: Vol I : the comparative reflection of common issues Vol II: country specific examination of adequacy performance and risks Adopted by SPC Key Messages -> Council Conclusions Vol I analyses common adequacy risks and suggest how they generally may be addressed Key risks are in Labour Markets as future adequacy tied to length of contributory working careers

3 The context and role of the PAR Complements the 2015 Ageing Report (AR) by analysing the future risks to adequate old-age incomes while using the same set of assumptions. Starting point the AR findings: Reforms implemented since 2009, aimed at safeguarding future sustainability of pensions, are bringing results. The 2015 Ageing Report estimates that public pension expenditure (in % of GDP) in 2060 will be no higher than in 2013, despite the dramatic rise in the proportion of people aged 65 and over.

4 Starting points for 2015 PAR 2012 PAR When trying to reconcile and optimise sustainability and adequacy concerns Member States face trade-offs and difficult choices. SPC mandate for 2015 PAR assess reform by looking at risks to future adequacy and pinpoint reform possibilities that can advance both the adequacy and sustainability aspects of pensions.

5 PAR examines the Adequacy implications of the AR scenarios for improvements in fiscal sustainability

6 Drivers of public pension expenditure The 2013 to 2060 change in public pension expenditure (as % of GDP) ranges from a decline by -3.9 to an increase by 4.1 percentage points. The demographic factor considered in isolation would raise public expenditure for EU-28 by 7.6 percentage points of GDP. Coverage ratio: No of pensioners as percentage of population 65+: Restricting access to early retirement and raising the pensionable age would reduce the number of people receiving a pension and the increase of pension expenditure by 2.6 PPs. Benefit ratio: Lower pension benefits compared to wages will further reduce the increase by 3.0 percentage points. Overall increase in employment accounts for an extra reduction by 1.4 percentage points.

7 LMs alignment w. Pensions just one part of PAR s Multi-dimensional approach to adequacy

8 Chapters 2 & 3: Current living standards in old age and the role of pension systems The weight of employment in present pension outcomes and the current ability to work untill pensionable age

9 Gender gap in pensions (GGP) Average pension of women relative to the average pension of men On average, women's pensions are 40 percent lower than those of men

10 Gender Pension Gap In the EU as a whole, average pension income for women is around 40 percent less than for men. In earnings-related pension schemes this reflects gender differences in employment: pay, working hours and career duration Pension design features (universal coverage, min. pensions, care crediting, survivors etc.) can mitigate the differences. Gap ranges between 4% and 46%, but only three countries have gaps below 10 percent, whereas 15 have gaps of more than 30 percent.

11 GGP vs. gender gap in annual earnings No relationship between current gender gap in earnings and present gender gap in pensions as resulting from prior employment gaps

12 Present scores and Recent trends in retirement and working patterns 1 st pension take-up versus pensionable ages Employment rates of older workers by gender and age groups (incl olds)? Duration of working lives by gender? Inactive/retired among the year olds?

13 Average age of first pension claim 2012 To what extent do people current work untill the pensionable age?

14 Average age of first pension take-up in 2012 & pensionable age 2013 A significant gap in most Member States

15 Employment rate of older workers (55-64), 2014

16 Employment rates of older workers Significant improvements in most Member States

17 Employment rates by age group, 2013

18 Employment rates for year olds, 2013

19 Average length of working lives, by gender:

20 Average length of working lives, by gender:

21 Result of access to Early retirement restricted? In all MS bar EL, LU, PL, RO, the retired people aged have fallen In the EU28, they have fallen by almost 15 p.p. in 15 years

22 Understanding past trends Key drivers of change in late-career employment and retirement patterns? How to model factors in late-career employment and retirement patterns? How to explain differences between MS?

23 Drivers of rising OW employment rates? Pension reforms, notably early retirement restrictions? Enabling changes in age management in work places and labour markets? Structural changes - including Older Worker cohort & composition effects?

24 Drivers of rising OW employment rates? PAR observation 1: growth usually happened & accelerated before pension reforms were adopted or took effect PAR observation 2: in some countries OW rates seemed to shoot up as results of changes in work place & labour markets practices Reforms also underpinned changes but not as first or main drivers E.g. DK: no of early retirees fell dramatically over last 15 years : The take-up rate dropped from 72% to 52% : Stock of early retirees fell from 190,000 to 110,000 Some say this is the effect of two early retirement reforms, yet 2006-reform was supposed to take effect as off reform takes effect as off 2014 Still moderate 1998 reform may have played a part

25 Structural factors Acting as wind on the back or in the face of policy makers as they pedal Swimming with or against the current of changes Cohort and Composition effects: - Demography (55-59 / 60-64) - Sector (better average working conditions) - Education (affecting propensity to stay) - Gender (women far larger share)

26 Recent progress was promising.. Older workers' employment rate (50-69), shift , Source: Peschner 2014

27 .. but age-structural effects played a notable role Older workers' employment rate (50-69), 2002 and 2013 (%) by 5-year age-group Source: Peschner EU

28 PT EL CY DK SE RO IE CZ MT FI ES UK SI FR HU NL EU27 EU28 LV LT HR IT LU PL BG BE SK AT EE DE.. helping some countries, impeding others Source: Peschner 2014 Older workers' employment rate (50-69), shift between 2002 and Total change (%-pts) 15 due to cohort effect (demographic component)

29 Demography helped Germany whereas in France the "demographic component had negative impact Source: Peschner 2014 Older workers' employment rate (50-69) in DE, FR; demographic component Germany France Employment Rate Employment Rate Demographic component 10 Demographic Component Source: Own calculations based on Eurostat EU LFS and Europop 2013 population projection, Main Scenario

30 demographic component relative size of age groups may change Source: Peschner 2014 Older workers' employment rate (50-69) in DE, FR; demographic component Germany France Employment Rate Demographic component Employment Rate Demographic Component 10.. projected 10.. projected Source: Own calculations based on Eurostat EU LFS and Europop 2013 population projection, Main Scenario

31 Other structural factors: - Sectoral composition of older workers in employment - Educational achievement level - Gender composition

32 HU SE DE CZ FR FI DK AT UK IT EU27 EU28 BE PL EL NL PT CY IE HR LV BG SI RO ES LT HU SE DE CZ FR FI DK AT UK IT EU27 EU28 BE PL EL NL PT CY IE HR LV BG SI RO ES LT Sectoral composition Strong employment gains for older workers in SERVICES in most countries. Source: Peschner Share of services in total employment, age %pt. increase from 2013 to 2030 (proj.) % 120% Employment in services, age %-increase from 2013 to 2030 (proj.) 100% 80% 60% 40% 20% 0% -20%

33 Educational progression..and (as higher education means higher employment rate).. Source: Peschner 2014 Employment rate by age and educational attainment level in 2013, % to 64 years 55 to 64 years EU All ISCED 2011 levels Low MEDIUM HIGH

34 Educational progression.. will continue to shift employment. Future projected employment gains due to educational progression, million people as from 2013 Source: Peschner EU % %

35 Modelling factors in late-career working and retirement patterns Typology of factors: A. Explaining early withdrawal from the labor market - PUSH, PULL & JUMP B. Explaining prolongation of working life - STAY & STUCK Patterns embedded in collective agreements, sector traditions etc., rarely based just on individual motivations/decisions Nearly always mix of factors

36 Illustration: retirement factors may differ between groups of workers PUSH: manual workers leaving the labor market at years of age for workability and employability reasons pushed out by WP & LM conditions PULL: white colour workers (weighing future pension w. economic situation before retirement and leisure against work) - lured out by benefit generosity JUMP: Blue & white where family concerns are key. Women follow their husband out of the labor market. Life projects people also self-motivated STAY: appreciated and accommodated skilled workers & professionals; satisfying well-remunerated jobs are attractive; STUCK: unable to afford retirement no social alternative to work; Source: Jensen 2014

37 Modelling of factors in early retirement and working longer patterns Levels of operation Typology of factors PUSH PULL JUMP STAY STUCK RETENTION - Same job RETENTION- New job RE-HIRED New Job Individual worker Women/Men Work Place Women/Men Typology of Factors in Early Retirement Types of Motivation for Working Longer Forms of Working Longer Labour Market Women/Men

38 Longer working lives possible if (1) Older workers are able to continue working (poor health resulting from mix of poor life style & working environment) 40 % of DK early retirees report that they have left the Labour Market because of poor health (2) Older workers are willing to continue working About 1/3 of DK early retirees report that they would have been able to retire even if the early retirement scheme did not exist (3) That older workers are wanted in the Labour Market About 1/3 of DK early retirees would have liked to continue in a job if it had been possible to get one. Source: Jensen 2014

39 No easy explanation of country differences Employment rates 55-64, 2013

40 Explaining country differences Conditions & policies in best/worst performers in levels & speed of change Interaction w. employment legislation & collective agreements e.g. de facto mandatory retirement or EPL Changes in age management practices in WPs & LMs Scope and timing of pension reforms

41 Chapter 4: Pension reforms and their likely impact

42 Trends in recent pension reforms 1 Move from PAYG to funded halted Contrary to earlier reform waves, the reforms since 2008 have not pursued a shift from public pay-as-yougo to privately managed funded pension schemes. Several countries have partially or fully reversed earlier reforms but some continue. MS with well-established occupational and personal pension schemes have sought to consolidate them. Reductions in the relative value of benefits: valorisation/accrual rates and indexing such reforms embody traditional trade-offs between adequacy & sustainability

43 Trends in recent pension reforms 2 Reform elements aiming to extend working lives: Access to Early retirement (incl. disability) restricted Age for early retirement raised Pensionable age increased Women Pensionable age brought up to men's Length of contribution period increased Automatic indexation to life expectancy Limit on combining work and pension eased Such reforms could avoid traditional trade-offs, YET will also imply that lifelong labour market risks are added to other risks related to pension adequacy.

44 LMs & pensions after 20 years of reforms Pension adequacy will increasingly depend on the ability of labour markets to deliver longer and less interrupted working careers - At the same time pensions offer far less support for employment problems in late-career labour markets Before the Social Partners could off-load problems of age management, employability, workability in late-career work places and labour markets to social protection systems through early exit pathways now these are closing Moreover, pensionable ages are being raised no longer any helping hand from pensions Social partners and policy makers will in future have to solve employability & workability problems where they arise: in work places and labour markets

45 Results of 20 years of pension reforms Degree of social protection in pensions before and now From social protection towards social insurance in public pensions From defined benefit constructs towards defined contribution like arrangements From best years plus a lot of crediting of well-deserving activities to career average with no or very limited crediting Before one could be reasonably well protected in retirement even though one had an erratic, miserable working life with years of unemployment/sickness and of low pay if one managed to land 5, 10 or 15 good years Now if one is miserable in working life one will be miserable in retirement except minimum protections have improved

46 Chapter 5: Adequate pensions in a long-term perspective (role of longer working lives in future adequacy)

47 Types of risks for future adequacy All pension arrangements entail varying exposure to internal and external risks 2 main risks to future pension adequacy from recent reforms: the reduction in the relative value of pension benefits due to tighter links with contributions and weaker valorisation and indexing career patterns that fail to match rising pensionable ages or meet contribution period requirements.

48 Significant risks for future replacement rates of pensions Theoretical replacement rates from public pension schemes are projected to decrease in the majority of Member States over the next 40 years, with a decline by more than five percentage points in 16 countries and by fifteen or more percentage points in six Member States. Increases in effective retirement ages could mitigate the reduction in replacement rates in most Member States, as longer careers generally result in better individual pension entitlements.

49 Change in gross TRRs, total, Substantial differences across Member States Increase projected for nine countries

50 Net TRRs 2053: impact of rising retirement ages Longer careers up to the increased future pensionable ages will lead to higher replacement rates though the effect differs across MS

51 Retiring early vs. working beyond pensionable age Retirement 2 yrs before the SPA can result in substantially lower TRRs Penalties and bonuses not always symmetric

52 Forced early retirement due to unemployment Being forced to leave the labour market five years before the SPA can result in substantially reduced TRRs in the future

53 Forced early retirement due to disability Similary, leaving the labour market for disability reasons five years before the SPA can lead to significant drops in old-age pensions

54 Short career (30 years) compared to full career Long interruptions in contributory periods will have a major impact on replacement rates in the future

55 Evolution of gap between average effective exit ages (EEA) and standard pensionable ages (SPA) between 2014 and 2060, MEN MS SPA Gap: SPA-EEA SPA Gap: SPA-EEA SPA Gap: SPA-EEA SPA Gap: SPA-EEA Change in gap BE BG CZ DK DE EE IE EL ES FR HR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK

56 Risks in Work Places and Labour Markets Supply side factors reduced workability (including for work-related health problems) reduced employability (including due to out of date skills and reduced productivity and adaptability). Demand side factors lack of flexibility in working arrangements, negative perceptions and age discrimination affecting processes of hiring, firing and promotion absence of appropriate age management. Working conditions Health & safety

57 Policies addressing adequacy risks in LMs Priority: enabling as many workers as possible to work up to the pension age and beyond thus raising the effective retirement age. General policies promoting sustainable employment over life also cater to pension adequacy But need for special policies in late-careers (i.e. enabling & encouraging changes in age management in WPs & LMs) Safeguards for those w. short careers / unable to continue to pension age: Minimum & Disability pensions; Crediting of unemployment, sickness & caring. Policy maker challenge: avoiding safeguards undermine incentives to work longer & save more

58 Problems in late-career labour markets: Retention versus Rehiring Source: OECD (2015), Working Better with Age: Poland, OECD Publishing, Paris. Notes: The retention rate refers to employees currently aged with tenure of 5 years or more as a percentage of all employees aged years previously. The hiring rate refers to employees aged with job tenure of less than 1 year as a percentage of all employees aged the year before.

59 Desired: Functioning Late-career LMs (cf. SPC & EPSCO Council) Older workers should not be restricted to staying longer in the same job, but should have an option of finding a new job with working conditions and times that match their abilities, needs and preferences. More older workers may wish to work beyond the statutory retirement age, including as self-employed. Pension systems should allow it without penalties (even promote it).

60 Policy mix for delivering longer working lives

61 Pensions depend on tackling of key challenges in late-career LMs Enabling and encouraging working longer Enlarging demand for and productively employing the labour supply from ageing workers and so Ensuring that workers in their working and contributory careers can match requirements in reformed pension systems and deliver adequate pensions

62 The career length people manage to achieve The average duration of working life is above or close to 40 in a few MS Among women, it is substantially lower but raising faster

63 Present versus future alignments Average duration of working lives presently not well aligned to 40 years contribution norm For men still more than 2 years below and for women almost 8 years Yet over last decade it grew 1.5 year for men and 3 years for women If it continues to grow with same speed when will an EU average of 40 years be reached?

64 Date when duration of working life reaches 40 years, by sex (if trend in the period is continued)

65 Men at 40yrs in 2035 and Women before 2040 Thus ending on a 'yes we can' scenario Thank you for your patience