Pensions at a Glance: Europe and Central Asia Edward Whitehouse Head of Pension-Policy Analysis Social Policy division OECD European Commission/ World Bank conference Reforming Pension Systems in Europe and Central Asia Brussels, June 2012
Assessing current and future adequacy Four complementary methods for analysing pension systems income-distribution data on retirement incomes or administrative data on pensions macro-projection of pension-system finances institutional approach: parameters and rules micro-simulation of individual pension entitlements
Core adequacy: Defining adequacy retirement incomes are sufficient for a certain basic standard of living pension levels relative to economy-wide living standards Broad adequacy: retirement incomes are comparable with those when working avoids a big drop in living standards into retirement pension levels relative to individual incomes when working (replacement rates)
Income-distribution analysis 1
Income poverty 25 Population income-poverty rate Old more likely to be poor 20 LTU POL ROM IAT LVA ESP GRC PRT HRV BLG 15 10 LUX HUN SVK NLD ISL IRL EU27 EST MLT DEU FRA SWE DNK FIN AUT NOR BEL GBR SVN CHE CYP CZE 5 less likely 0 0 5 10 15 20 25 30 35 40 Old-age income-poverty rate Source: EU Survey of Income and Living Conditions
Core and broad adequacy 30 IRL Old-age income-poverty rate AUS GRC USA MEX 20 CHE JPN ESP PRT TUR 10 DNK FIN GBR BEL NOR ITA DEU FRA AUT SVK SWE HUN ISL CAN POL 0 NZE CZE 60 70 80 90 100 Average older people s income, per cent of population incomes Source: OECD income distribution database; see OECD Pensions at a Glance 2009 NLD LUX
Institutional analysis 2
Current value of safety-net benefits Social assistance/non-contributory minimum pension Contributory minimum pension Belgium Norway Luxembourg Slovenia Malta Netherlands Austria Greece UK Portugal Ireland Spain Slovakia 0 10 20 30 40 50 Source: APEX models France Germany Italy Poland Sweden Denmark Finland Lithuania Latvia Estonia Hungary Czech Republic Cyprus 0 10 20 30 40 50 Safety-net retirement benefits net of tax per cent of average net earnings
Current value of safety-net benefits Social assistance/non-contributory minimum pension Contributory minimum pension Netherlands Greece Belgium UK Malta Luxembourg Austria Norway Portugal Spain Ireland Poland Slovenia Germany Sweden Germany Sweden Slovakia France Denmark Italy Finland Hungary Lithuania Latvia Estonia Czech R Cyprus 30 40 50 60 70 80 90 100 110 120 130 Source: APEX models; Eurostat for at-risk-of-poverty thresholds 30 40 50 60 70 80 90 100 110 120 130 Safety-net retirement benefits net of tax per cent of income-poverty threshold
Future adequacy: indexation policies Indexation of value of safety-net benefits: basic, means-tested and minimum pensions Prices 80p/20w 67p/33w 50p/50w Wages 0.3% Belgium Italy Portugal Spain Sweden Poland Czech R Bulgaria Estonia Hungary Latvia Denmark Wages Cyprus Ireland Lithuania Luxembourg Malta Netherlands Norway Slovenia United Kingdom Discretionary Austria Source: European Commission (2009), Updates of Current and Prospective Theoretical Pension Replacement Rates; OECD Pensions at a Glance 2011
Implications for future adequacy Earnings growth Percentage price Net benefit, per cent of average net earnings Net benefit, per cent of poverty threshold assumption indexed 2008 2053 2008 2053 Belgium 1.7% 100 43.7 20.2 117.1 54.1 Czech Republic 2.3% 67 17.5 8.7 44.5 22.1 Estonia 2.9% 50 17.8 9.2 50.6 26.2 Finland 1.9% 100 25.4 10.7 67.6 28.5 France 1.7% 100 30.6 14.1 79.4 36.7 Hungary 2.4% 50 17.6 10.2 61.8 35.9 Italy 1.5% 100 28.0 14.2 66.9 33.9 Latvia 2.9% 50 21.4 11.1 54.3 28.1 Poland 2.5% 80 21.2 11.0 97.1 39.1 Spain 1.8% 100 32.5 14.3 98.3 43.4 Sweden 1.8% 100 26.8 11.8 91.8 40.5 Source: Whitehouse, E.R. (2012), Evaluating adequacy and sustainability of pension systems: evidence from Europe, Social, Employment and Migration Working Paper, OECD, forthcoming
Macro-level analysis 3
Benefit ratios: public schemes, 2010 Luxembourg Spain Malta Finland Italy Norway Germany Poland Bulgaria Slovakia Cyprus Austria France Belgium Lithuania Romania Estonia Greece Denmark Sweden Hungary Czech R 0 10 20 30 40 50 60 0 10 20 30 40 50 60 Average pension, per cent of average earnings
Benefit ratios: public schemes, 2010 Luxembourg Malta Spain Cyprus Finland Italy Norway Germany Bulgaria Belgium Austria Lithuania France Denmark Slovakia Greece Romania Hungary Sweden Czech R Estonia Poland 0 10 20 30 40 50 60 0 10 20 30 40 50 60 Average pension, per cent of average earnings
Benefit ratios: public schemes, 2010-60 2060 projected benefit ratio Projected change in benefit between 2010 and 2060 Luxembourg Malta Spain Cyprus Finland Italy Norway Germany Bulgaria Belgium Austria Lithuania France Denmark Slovakia Greece Romania Hungary Sweden Czech R Estonia Poland 0 10 20 30 40 50 60 0 10 20 30 40 50 60 Average pension, per cent of average earnings
Benefit ratios: public and private 2060 benefit ratio: public schemes 2060 benefit ratio: private schemes Luxembourg Malta Spain Cyprus Finland Italy Norway Germany Bulgaria Belgium Austria Lithuania France Denmark Slovakia Greece Romania Hungary Sweden Czech R Estonia Poland 0 10 20 30 40 50 60 0 10 20 30 40 50 60 Average pension, per cent of average earnings
4 Micro-level analysis of individual pension entitlements
Architecture of pension systems Adequacy-oriented benefits: nearly all countries have social assistance or a social pension basic (not earnings-related) pensions are relatively common: ALB, ARM, AZE, CZE, EST, LTU, KGZ, RUS, TKM contributory minimum pensions in a similar number of countries
Architecture of pension systems Income-replacement benefits Diverse design of public schemes: defined-benefit plans in ALB, BLR, CZE, HUN, LTU, KAZ, MDA, UKR, UZB points schemes in ARM, EST, HRV, MNE, SRB, SVK notional accounts (NDC) schemes in AZE, KGZ, LVA, POL, RUS, TKM Mandatory defined-contribution common: BGR, EST, HRV, KAZ, KGZ, LVA, LTU, MCD, POL, ROM, RUS, SVK, UNK + CZE HUN
Modelling entitlements Full-career workers: contribute every year from age 20 (or standard entry age) to normal pension eligibility age Across the earnings range Forward looking: all legislated reforms fully in place steady-state assumption new labour-market entrants Standard macro and financial assumptions earnings growth, real rate of return, discount rate A policy indicator, not a forecast
Gross pension replacement rate 125 Gross replacement rate, average earner, per cent 100 75 Averages OECD: 57.3% EU27: 61.6% 50 25 Source: APEX models 0 MCD UKR UZB ROM EST UNK LIT BIH HRV TUR BUL KAZ POL SRB TKM LAT CZE SVK RUS ALB SVN HUN MNE
Gross pension replacement rate 125 100 75 Replacement rates, average earner, per cent Averages OECD: 68.8% EU27: 74.2% Gross Net 50 25 Source: APEX models 0 MCD UKR UZB ROM EST UNK LIT BIH HRV TUR BUL KAZ POL SRB TKM LAT CZE SVK RUS ALB SVN HUN MNE
Low and high earners 125 100 Net replacement rates, low and average earner, per cent Averages OECD: 82.8% EU27: 81.8% Average wage Low earner 75 50 25 Source: APEX models 0 MCD POL UKR SRB UZB TKM ROM LAT EST CZE UNK SVK LIT RUS BIH ALB HRV SVN TUR HUN BUL MNE KAZ
Conclusions 5
Assessing current and future adequacy Four sources of information for evaluation Key indicators: income-poverty rate primary: BLG, HRV, CHE; secondary: ESP, GRC, PRT, GBR safety-net benefit levels primary: CZE, EST, LAT; secondary: HUN, LTU benefit ratios primary: EST, POL; secondary: CZE, HUN, ROM net replacement rates primary: MCD, POL, ROM, SRB; secondary: LTV, SVK
Assessing current and future adequacy Four sources of information for evaluation Key indicators: income-poverty rate safety-net benefit levels benefit ratios net replacement rates