P R O S T Pension Reform Options Simulation Toolkit Tatyana Bogomolova, World Bank, HDNSP 1
Why Modelling? Many factors have to be taken into account when assessing a real pension system, and its different reform options: Demographic Economic Policy variables/pension system parameters Individuals behavior Pension system analysis requires long-term projections Useful tool in pension system diagnosis and evaluation of reform options; a tool to organize thinking about pension systems 2
What is PROST? PROST computer-based toolkit to simulate pension systems over a long timeframe Created to support World Bank pension policy dialogue in client countries User-friendly, input-output in Excel Regular updates with new features Individual country and cross-country studies (used in 90+ WB client countries and some cross-country studies) More details in Modeling Pension Reform: The World Bank s Pension Reform Options Simulation Toolkit (www.worldbank.org/pensions) 3
Key Features of PROST Deterministic cohort-based model: models single year cohorts, tracks them down over time Projects coverage, contributions, entitlements, financial flows Allows to look at pension system as a whole as well as at individuals Addresses all main pension policy dimensions, all policy variables exogenous Generic, flexible, easily adapted to various country circumstances Modeling reforms relatively fast and easy 4
Input Data and Assumptions Demography Population Fertility Mortality Migration Economy Macroeconomy (GDP, inflation, interest rates) Labor market (LFPR, unemployment) Pension system Pension system data (number of contributors, pensioners, wages, initial pensions) Pension policy Behavior of pension system members (contribution density, retirement pattern) 5
Input Data: policy variables PAYG, non-financial DC, fully funded DC Coverage Contribution rate, contribution ceiling Retirement age, early retirement Benefit formula in DB systems (accrual rate, max replacement rate, averaging period, valorization) Min, max pension Penalties for early retirement Pension commutation Pension indexation Notional interest rate Annuity factors 6
General Calculation Scheme Population Contributors PS revenues Economy Pension system Pensioners PS expenditures Annual current balance - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Implicit Pension Debt - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Individuals 7
PROST Output Demographic projections Population Life expectancy Population dependency ratios Pension system demographics Number of contributors Number of pensioners (by pensioner category) System dependency rate Coverage rate Pension system finances (PAYG DB, NDC, FFDC) Wages, entitlements Pension system revenues, expenditures, current balance, assets/debt Implicit pension debt in PAYG Equilibrium contribution rate for PAYG DB Output for individuals (contributions, benefits, NPV, IRR) 8
Example: pension system diagnosis No Reform: System Dependency Rate (number of pensioners/number of contributors) No Reform: Average Pension for Old Age Pensioners (% of average wage of contributors) 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 2010 2020 2030 2040 2050 2060 2070 2080 0% 2010 2020 2030 2040 2050 2060 2070 2080 old age pensioners all pensioners new pensioners all existing No Reform: System Finances, % of GDP 20.0% 15.0% 10.0% 5.0% 0.0% 2010-5.0% 2020 2030 2040 2050 2060 2070 2080-10.0% -15.0% revenues expenditures balance No Reform: Implicit Pension Debt, % of GDP 350% 300% 250% 200% 150% 100% 50% 0% 2010 2020 2030 2040 2050 2060 2070 2080 9
Example: impact of raising retirement age 100% 80% 60% 40% 20% 120% 100% Raising Retirement Age System Dependency Rate (number of all pensioners/number of contributors) 0% 2010 2020 2030 2040 2050 2060 2070 2080 80% 60% 40% 20% baseline reform Raising Retirement Age Average Pension for Existing Old Age Pensioners (% of average wage of contributors) 0% 2010 2020 2030 2040 2050 2060 2070 2080 baseline reform Raising Retirement Age Average Pension for New Old Age Pensioners (% of average wage of contributors) 120% 100% 80% 60% 40% 20% 0% 2010 2020 2030 2040 2050 2060 2070 2080 2.0% -4.0% -6.0% -8.0% -10.0% -12.0% baseline reform Raising Retirement Age Annual Current Balance, % of GDP 0.0% 2010-2.0% 2020 2030 2040 2050 2060 2070 2080 baseline reform 10
Example: individual perspective Profile : input No reform Raising retirement age Contribution gaps (age) Gender Male Male 22 Starts Working at Age 18 18 23 Plans to Retire at Age 60 65 24 Mortality Multiplier 1 1 25 Starting Wage as % of Cohort Avg. 80% 80% 26 Productivity Growth Multiplier 0.8 0.8 34 Output No reform Raising retirement age Initial Replacement Rate in Terms of Average Wage 45.1% 45.9% Initial Replacement Rate in Terms of Individual's Last Wage 74.8% 85.8% Replacement Rate at Death in Terms of Average Wage 45.1% 45.9% Internal Rate of Return 5.5% 4.8% Net Present Value of Being Covered in Terms of Average Wage 1.2 0.6 11
Pension System Diagnosis: policy questions Financial sustainability of PAYG systems (financial flows, government liabilities, implicit pension debt, financing gap) Adequacy of expected benefits (at retirement, postretirement, by pensioner category) Intra- and intergenerational distributional effects and equity issues 12
Assessment of Pension Reform Options with PROST Impact of reforms on pension system finances and benefits, transition costs Types of pension reform PAYG parametric reforms (changing contribution rates, retirement age, benefit formula, indexation, etc.) Systemic reforms (fully funded DC, notional DC schemes, any combination of PAYG DB, FF DC and NDC) Different transition paths Switching pattern Accrued rights Allows to model on-going DC/multipillar schemes 13
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