Robert Holzmann World Bank and University of Vienna

Transcription

1 A Framework for Analysis of International Pension Objectives, Challenges and Reform Issues World Bank Core Course on Pensions Opening Session, Monday, November 7, 2011 Robert Holzmann World Bank and University of Vienna

2 Background Public pensions in most high-income countries (HICs) and in many low-middle to middle income countries (LICs and MICs), it is the most important budgetary expenditure item (rivaling with health or defense outlays) Many pension systems are in deficit and most schemes are financially unsustainable (i.e. their actuarial balance is negative), including in countries with young populations while the coverage of the population remains low or even decreasing Current financial problems of pension schemes are largely the result of too high system dependency ratio and too generous benefits, but are little due to population aging and deterioration in demographic dependency ratio so far

3 Background 2/2 Further population aging is a world phenomena and the result of a reduction in fertility rate and an increase in life expectancy. But while the OECD countries became rich before becoming old, most of the other countries risk to become old before becoming rich While current and future fiscal problems are one main reason to reform pension programs, there are other important reasons linked to socio- economic changes and the challenges and opportunities of globalization Pension reform is topical reform item in all countries of the world, and is likely to remain so in the decades to come

4 PUBLIC PENSION SPENDING by REGIONS (as percent of GDP, early or mid 2000) REGION AVERAGE PENSION EXPENDITURE OECD 10.5 EUROPE and CENTRAL ASIA 7.3 LATIN AMERICA and the CARIBBEAN 3.6 MIDDLE-EAST EAST and NORTH AFRICA 3.2 ASIA 2.0 SUB-SAHARAN S AFRICA

5 Relationship Between Percentage of the Population over 60 Years Old and Public Pension Spending Pension spending as percentage of GDP 16 Poland Austria Italy 12 8 Luxembourg France Uruguay Greece Sweden U.K. 4 0 Panama Costa Rica U.S. Japan Israel Australia China Jamaica Percentage of population over 60 years old

6 Population Pyramids: Age and Sex Distribution, 2000 and W o rld 2050 A ge Percentage of M a le s Fem ales Percentage of A ge Percentage of M ore developed Percentage of A ge A g e Less developed Percentage of Percentage of Least developed Source: The Sex and Age Distribution Percentage of of the World Populations: the 1998 Revision, Percentage Volume of II. The Population Division, Department of Economic and Social Affairs, United Nations Secretariat.

7 Mali: Public Pension Expenditure and Wage Bill pensions as percentage of total current expenditure (left scale) pensions as percentage of total wages and salaries (left scale) pensions as percentage of GDP (right scale) approved actual actual actual actual revised 1994/ / / / / /

8 Variation in Coverage and Correlation with Per- Capita Income Japan Austria Germany Norway Finland Sweden Netherlands Canada United Kingdom Denmark Greece France Av. OECD Italy Portugal Spain Belgium Ireland Switzerland United States 80 Israel Contrib butors/ labor force (%) MongoliaEgypt Jordan JamaicaTunisia Uruguay Trinidad & Tobago Argentina Brazil Panama Malaysia Costa Rica Mexico Chile Korea, Rep. Average OECD y = -0.15x x R 2 = Turkey Colombia Paraguay Algeria Sri Lanka Philippines Guatemala Iran El Salvador Ecuador Honduras Morocco Kenya China Indonesia Cameroon Nicaragua Bolivia Zambia India Domenican Peru Rep. Venezuela Income per Capita (in thousands)

9 Road Map I. Society s Role in Assisting in Retirement Income Provision II. III. Determining the Set of Feasible Retirement Income 0ptions Challenges and Innovations in Pension Systems and Reforms

10 I. Conceptual Considerations: Society s role in retirement income (1/2) Decline of intra-family support,, due to Industrialization ti (away from agriculture) Urbanization and migration Double objectives for public intervention Poverty alleviation Societies care for the most destitute Societies fear the consequences of destitution Consumption smoothing Individuals prefer smoother consumption Requires shifting resources from active to non-active periods Has to deal with uncertainty of death Implies an intertemporal exchange which has to rely on other individuals (social management of risk and Robinson Crusoe) Welfare gains for lower income strata are higher Double rational of public intervention Perceived market failure Income redistribution (explicit or implicit)

11 Society s role. (2/2) Addressing key imperfections Short planning horizon,, due to myopia other risks and incomplete financial markets Lack of adequate instruments/financial markets Savings and annuity products Market development, regulation and supervision Dealing with poverty and moral hazard Old-age and incapacity to work Basic income support, protecting the government, and mandating Unequal income/wealth distribution Redistribution from life-time rich to poor (inter- and intrapersonal effects) Achieving solidarity through redistribution, or pooling of risks (with or without risk differentiation), or open risk coverage

12 II. The Set of Feasible Retirement Income Options Reflects i. The more specific goals of a (new) retirement systems ii. iii. iv. The reform needs of the existing system beyond fiscal crises The inherited system and the path dependency d of reform The enabling environment to reform the old and to implement the new system (economic, institutional, political)

13 i. Goals of a Pension System (Reforms) Primary goals: To provide adequate, affordable, sustainable and robust old-age income Adequate refers to both access to (coverage) and benefit level (absolute and relative, i.e. re poverty alleviation and income replacement) Affordable refers to the financing capacity of individuals and the society Sustainable refers to the financial soundness of the scheme, now and in the future Robust refers to the capacity to withstand major shocks, including those coming from economic, demographic and political risks Secondary goals: To create developmental effects by minimizing i i i negative impacts (e.g. labor market) leveraging on positive impacts (e.g. financial market development)

14 ii. Reform needs of the existing system beyond demographic crisis i (1/2) Fiscal Pressure Short-term term pressure and consequences of un- sustainability: macro instability and crowding-out out of other social expenditure Long-term pressure and aging of population: the challenge for developing countries The opportunities and challenges of migration Delivering on Promises The unfairness, over-promise and low coverage of formal schemes Poverty alleviation among the elderly

15 Reform needs of the existing system beyond demographic crisis i (2/2) Aligning i systems with Socioeconomic i Changes Increase in life-expectancy lf expectancy and old-age pension Increase in life-expectancy expectancy and disability pension Female labor force participation, divorces and widow s pensions Challenges and Opportunities i in Globalization Reacting to shocks the need of flexibility Mobility across professions and countries Financial Sector development a crucial element to a absorb shocks and to diversify risks

16 iii. The inherited system and the path dependency of reform country background matters. Key characteristics of a pension system Defined benefit (DB) vs defined contribution (DC) plans actuarial and risk sharing characteristics Unfunded (Pas-as-you-go) versus funded schemes narrow and broad funding Public versus private administration polar cases but increasingly mixed approaches

17 The inherited system and path dependency (2/2) The starting position of a country matters Case 1: Middle (-high) income country with comprehensive and expensive unfunded public scheme e and core financial a markets Case 2: Post conflict low income country with no inherited pension system, weak administration and no financial market Case 3: Low-middle income country with unfunded public schemes with low coverage (> 10% of population) and core financial i market Some prior decisions about systems are difficulty to reverse Having pension systems for too many special groups Being too generous to people p at young retirement age Moving from unfunded to funded systems

18 iv. The Importance of an Enabling Environment State of country development such as level of (in-) formality, income and urbanization Legacy of existing schemes, including the scope of coverage and level of explicit or implicit liabilities Administrative capacity to collect contributions, administrate files, disburse benefits and manage financial reserves Financial market condition such as sound core banking system and public debt market, and regulatory and supervisory capacity Macroeconomic stability, including sound public finance, external accounts, and low inflation rate Government determination and capacity to start a reform and to make it successful

19 Table 1. The Bank s Conceptual Framework Initial Conditions I. Inherited System Elderly vulnerability and poverty prevalence in absolute terms and relative to other age groups Eiti Existing mandatory dt and voluntary pension systems Existing social security schemes Existing levels of family and community support II. Reform needs such as modifying existing schemes in the face of fiscal unsustainability, coverage gaps, aging and socio-economic changes assessed against the primary and secondary evaluation criteria below III. Enabling environment Demographic profile Macroeconomic environment Institutional Capacity Financial market status Core Objectives of Pension Systems Modalities for achieving objectives Primary Evaluation Criteria Secondary Evaluation Criteria Protection against the risk of poverty in old age Consumption smoothing from work to retirement Zero Pillar non-contributory social assistance financed by the state, fiscal conditions permitting First Pillar mandatory with contributions linked to earnings and objective of replacing some portion of lifetime pre-retirement income. Second Pillar - mandatory defined contribution plan with independent investment management Third Pillar - voluntary taking many forms (e.g. individual savings; employer sponsored; defined benefit or defined contribution) Fourth Pillar - informal support (such as family), other formal social programs (such as health care or housing), and other individual assets (such as home ownership and reverse mortgages). Adequacy Affordability Sustainability Robustness Contribution to output and growth through: Lowering labor market distortions Contributing to savings Contribution to financial market development

20 III. Challenges and Innovations in Pension Systems and Reforms I. Dimensions of Reform Option II. Addressing Old-Age Poverty: Integrated Social Pension Benefits 1/ III. Addressing Financial Sustainability and Population Aging: Non-Financial Defined Contribution (NDC) Schemes 1/ IV. Addressing (In-)Formality and Voluntary Savings: Matching Defined Contribution i (MDC) Schemes 1/ V. Reforming Civil Servants / Harmonization of National Pension Schemes 1/ VI. Portability of Pension Benefits across Professions, Sectors and Borders 1/ Presented in own sessions

21 i. Dimensions of Reform Options Parametric reforms such as Increase in retirement age Reduction in annual accrual factor Change benefit indexation Increase in contribution rate or paradigmatic (systemic) reform with changes in key aspects From defined benefit to defined contribution plans From unfunded to funded Form public to private administration Single versus multi-pillar reforms Target group of system and reform

22 Table 1. Multi-Pillar Pension Taxonomy Pillar Lifetime poor Target groups Informal sector Main criteria Formal sector I. Characteristics Participation Funding/collateral 0 X x x Social pension, at least social assistance, universal or means- tested 1 X Public pension plan, publicly managed, defined-benefit or notional defined-contribution 2 X Occupational or personal pension plans, funded defined-benefit or funded, d defined-contribution d tib ti 3 X X X Occupational or personal pension plans, funded defined-benefit or funded, defined-contribution 4 X X X Homeownership, family support and so forth Residual Mandated Mandated Voluntary Voluntary Note: The size of x or X characterizes the importance of each pillar for each target group. Budget/general revenues Contributions, perhaps with financial reserves Financial assets Financial assets Financial assets

23 vi. Portability of Pension Benefits Capability of carrying without loss pensions in payment or acquired rights for future pensions across professions, sectors and borders Traditional DB schemes with long vesting periods, changing accrual rates, etc create typically losses for mobile labor worker unless mitigated by agreements 4 broad types of portability regimes I. Access to social security and portability through bi-or muliti- lateral agreements II. Access to social security and exportability by national legislation III. Formal labor market participation, but no access and no contributions to social insurance IV. Informal labor market participation and hence no eligibility to and portability of SI benefits

24 Table 3: Global migrant stock estimates of Regime IV migrants only (undocumented migrants) by origin and host income-group (2000) Host country income-group Lower middleincomincome Upper middle- Non-OECD OECD high- Origin country Low-income high-income income income-group countries countries countries countries countries Total Low-income countries 3,775,249 3,681, , ,591 1,957,132 10,757,086 Lower middleincome countries 779,250 6,156,610 1,471, ,669 5,095,494 14,473,805 Upper middleincome countries 111, , , ,799 6,037,875 7,203,975 Non-OECD high-income countries 1,949 12,663 3,319 2,052 37,825 57,809 OECD highincome countries 11,442 26,805 17,160 8, , ,802 Total 4,679,780 10,408,798 2,508,064 1,831,674 13,254,160 32,682,476 24

25 Portability (2/2) Bi- or multi lateral agreements are rare between South and Northern countries because complex and time consuming to establish but their number increases NDC/FDC benefits are, in principle, i portable by definition, but raises issues of their own, e.g. Portability of social pension/distributive elements Taxation of contribution and benefits and differences in approaches/tax revenues

26 Parting Thoughts Pension is a fascinating yet complex topic that touches on all aspects of social and economic science. Hence, a single-minded approach will not do it justice Pension policies are subject to changes (fads?) that reflect growing knowledge, changes in enabling environment as well as innovations. This calls for flexibility as well as rigorous review As for other topics, to be successful in policy design and implementation requires a full results framework/ results chain OBJECTIVE INPUT INTERVENTION OUTOUT PUT OUTCOME IMPACT

27 Selective References 1. Holzmann, Robert, Edward Palmer and David Robalino, 2012, Non-Financial Defined Contribution (NDC) Systems:, Progress and New Frontiers in a Changing Pension World, In Finalization. 2. Holzmann, Robert and Johannes Koettle Portability of Pensions, Health and other Social Benefits: Facts, Concepts, Issues. Social Protection Discussion Papers No Holzmann, Robert, David A. Robalino, and Noriyuki Takayama, editors, 2009, Closing the Coverage Gap,, The World Bank. 4. Holzmann, R., Richard Hinz, and Mark Dorfman The World Bank Pension Conceptual Framework. World Bank Pension Reform Primer 09/08. Washington, DC: World Bank. 5. Holzmann, R., Richard Hinz, and Bank Team, Old- Age Income Support in the Twenty-first Century: An International Perspective on Pension Systems and Reform. Washington, DC: World Bank.