Global Patterns of Pension Provision Robert Palacios, Lead Pensions, World Bank Pension Core Course, April 27, 2015
Evolution of global pension policy 1689 1889 1982 Today
Design and performance Design Mandatory contributory scheme design - defined benefit or Defined contribution? Voluntary private pensions Non-contributory (social) pensions Civil service pensions Performance Adequacy Coverage Sustainability 3
THE RISE OF DB SCHEMES:1935 the old age pensions he called for came to be financed with wage based taxes was an accident.
THE RISE OF DB SCHEMES: 1975
THE RISE OF DB SCHEMES: 2015
Number of Countries THE RISE OF DC SCHEMES: FROM SANTIAGO TO PRAGUE 35 30 25 20 15 Chile United Kingdom Peru Uruguay Argentina Australia Mexico 12 Bolivia El Salvador Hungary Kazakhstan Poland Sweden 14 15 17 Hong Kong Nigeria Slovakia Costa Rica Dom. Rep. Kosovo 21 23 24 Bulgaria Croatia Estonia Argentina closed Romania Czech Repub Macedonia Hungary closed 27 28 29 28 27 28 10 5 0 8 7 6 3 2 1 1980 1988 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2011 2012
Share of benefit from DC Proportion of benefit from private DC vs public DB Colombia 1 Costa Rica 1 0.75 0.75 Private DC 0.5 0.5 0.25 Minimum pension Private DC 0.25 Public DB scheme 0 0 0.5 1 1.5 2 2.5 3 Low income High income 0 0 0.5 1 1.5 2 2.5 3 Low income High income
GLOBAL PENSIONS BY TYPE OF MANDATED CONTRIBUTORY SCHEME 9
Mandated pensions today Publiclymanaged DB, PAYG 43% Publiclymanaged DC 7% Privately- Managed, funded DC 4% Public PAYG DB + Private funded DC 18% Publicly- managed partially funded DB 31% Note: Select countries: only national contributory schemes included
VOLUNTARY PRIVATE PENSIONS ARE IMPORTANT IN ONLY A FEW COUNTRIES 11
Generosity of the Mandatory Systems is the Strongest Incentive: Income Replacement Rates and Voluntary Private Pension Coverage in OECD Source: OECD, Pensions at a Glance, 2007
CIVIL SERVICE PENSIONS 13
THE ROLE OF SOCIAL PENSIONS IS GROWING 14
Performance - CAS Sustainability Adequacy Coverage
IMPLIED TARGET REPLACEMENT RATES 16
TARGET VERSUS ACTUAL REPLACEMENT RATES Implied Target RR 17
Public pension spending as % of GDP Pension spending and ageing 20 18 16 14 12 10 8 Philippines Vietnam y = 0.4362x - 1.0813 R² = 0.6867 Japan 6 4 2 0-2 Mongolia Timor Thailand China Korea 0 5 10 15 20 25 30 35 Lao Cambodia, Indonesia, Myanmar Percent of population 60+ Hong Kong
Life cycle of PAYGO scheme 60 50 40 surplus/revenues 30 20 10 0-10 -20-30 0 0.05 0.1 0.15 0.2 elderly/workers
Parametric and systemic reforms Parametric Raising effective retirement ages and linking with longevity Raising contribution rates Reducing future accrual rates and taking into account longer wage periods Moving to price indexation Notional accounts or NDCs Replacing part or all of DB with DC
Contribution rates 21
Pension incentives to work/retire Netherlands Poland Germany Finland Hungary France Spain Japan Sweden Ireland United Kingdom New Zealand United States OECD Canada Australia Italy Belgium Portugal Turkey (-34), Greece (-90), Luxembourg (-76) -30-20 -10 0 10 20 30 Change in pension wealth from working an additional year, between ages 60 and 65, per cent of annual earnings Source: OECD Pensions at a Glance
MANDATORY CONTRIBUTORY PENSION COVERAGE 23
Pension coverage and income level
Elderly coverage 25
Summary and looking forward For a century, public DB plans spread across the globe and dominated pension provision but Unfunded liabilities are catching up with maturing systems as the demographic transition unfolds resulting in cuts In the last two decades, prefunding and especially DC plans have taken on a greater role raising new issues of costs, investments, payouts and supervision Coverage has emerged as the key issue for most low and middle income countries with policy discussion centered on the potential role of social pensions and innovative ways of incorporating the informal sector workforce Will younger countries learn from the experience of the older countries (or repeat their mistakes)? How will older countries strike the balance between sustainability and adequacy?
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