Pension policy in developed countries

Assessment of alternative reforms in response to population aging

by Gary BurtlessSenior Fellow, The Brookings Institution,

Washington, DC

Old-age dependency burden

Immense concern, especially in countries with low fertility - - Japan, Italy, Spain

Narrow focus of concern: Public cost of programs that support elderly

Broader view of dependency:

Aged dependents – 65+

Child dependents – 0-14

Non-working adult dependents – 15-64

Age profile of factor incomes /Paygo transfer benefits

Figure 1. Stylized Distribution of Factor Incomes and Paygo Benefits, by Age

Factor income of 35-54 year-olds = 100

48

100

73

286 8

39

66

18 14

0

20

40

60

80

100

120

15- 34 35- 54 55- 64 65- 94 15-94

Age group

Factor income

Paygo benefits

Age profile of factor incomes: USA

Factor income received by average 45-49 year-old = 100

7

33

62

77

8894

100103

94

72

49

3832 31

262132

59

71

8185 88 87

74

48

10 3 2 36

20

60

20

40

60

80

100

120

15-19 25-29 35-39 45-49 55-59 65-69 75-79 85-89

Age group: United States

Capital income

Labor income

Age profile of paygo transfers

LIS Income Reports: Transfers received measured as % ofAverage Factor Income Received by 45-49 year-olds /a/

0

10

20

30

40

50

60

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

Age group

Germany

Finland

UK

USA

Impact of aging on tax rate needed to finance paygo transfers

Tax in 2000 = 100

90

100

110

120

130

140

150

2000 2010 2020 2030 2040 2050

Effect of shifting agedistribution onfactor incomes

Effect of shifting agedistribution on

benefit payments and distribution of

factor incomes

Total impact of shifting agedistribution, including

interaction effects

Japanese dependency burden: Alternative estimates of child dependent costs

t (Percent of contemporaneous wage)

10

20

30

40

50

1950 1975 2000 2025 2050

0.75

0.50

0.25

0.10

a =

Japanese & USA dependency burdens: Alternative child costs

t (Percent of contemporaneous wage)

10

20

30

40

50

60

1950 1975 2000 2025 2050

Japan (a = 0.75)USA (a = 0.75)

USA (a = 0.10)

Japan (a = 0.10)

Old-Age Dependency Ratios in G-7 Countries, 2000-2050

66.8

64.6

53.2

50.8

45.9

45.3

37.9

28.8

27.7

26.6

27.2

20.4

26.6

21.7

0 20 40 60 80

Italy

Japan

Germany

France

Canada

UK

USA

Old-age dependency ratio (%) /a/

2000

2050

Old-age pension spending in G-7 countries, 2000-2050

13.9

15.9

16.8

8.5

10.9

6.2

3.6

14.2

12.1

11.8

7.9

5.1

4.4

4.3

0 5 10 15 20

Italy

France

Germany

Japan

Canada

USA

UK

Public pensions as % of GDP

2000

2050

Decline in average old-age pension relative to real average wage, 2000-2050

-3.7

-6.4

-13.7

-21.3

-30.6

-38.4

-47.0

-50-40-30-20-100

USA

Canada

Germany

France

Italy

Japan

UK

% benefit cut /a/

Poverty among aged persons in G-7 countries, 1992-1997

5.3

7.0

9.8

12.2

13.7

18.4

20.7

0 5 10 15 20 25

Canada

Germany

France

Italy

UK

Japan

USA

Percent of elderly population in poverty /a/

U.S. poverty rate among aged and non-aged adults, 1959-2003

Percent in poverty

0

5

10

15

20

25

30

35

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Persons 65 and older

Persons 18 to 64years old

Japanese dependency burden with faster growth in labor force participation, 1950 - 2050

t (Percent of contemporaneous wage)

10

15

20

25

30

35

40

45

1950 1975 2000 2025 2050

Pe

rce

nt

of

ea

rnin

gs

With a higher participation rate

With participation rates of 2000

0

2

2

2

4

1

3

4

5

5

7

7

7

2

3

4

5

6

6

6

8

10

10

11

12

13

14

9

29

0 3 6 9 12 15

Sweden

Japan

United States

Switzerland

United Kingdom

Australia

Canada

Unwtd. avg. of these countries

Finland

Germany

Italy

France

Spain

Belgium

Netherlands

Percentage change in 15-64 year-old work force

With 1960 retirement pattern

With 1980 retirement pattern

Estimated change in 2030 labor force under alternative retirement scenarios, selected OECD countries