Long-run Pension System Reforms in Europe and

Central AsiaAnita M. Schwarz

Lead EconomistHuman Development DepartmentEurope and Central Asia Region

World Bank

May 2009

Population in Region is Aging

0-1420%

15-6469%

65+12%

Population Structure in 2005

0-1416%

15-6462%

65+22%

Population Structure in 2050

What Used to Be Affordable May Not Be in the Future

Relatively low retirement ages– Differential between retirement age for men and

women Relatively generous early retirement provisions Wage indexation of benefits after retirement to

maintain pensioner’s position relative to workers Relatively generous benefits for limited years of

contribution

Most OECD Countries Set Retirement Age at 65

Austral

iaAust

ria

Belgium

Canad

a

Denmark

Finland

France

Greece

German

y

Icelan

dIre

land

Italy

Japan

Luxem

bourg

Netherl

ands

New Zea

land

Norway

Portug

alSpa

in

Sweden

Switzerla

nd

Turkey

2048 UK US

40

45

50

55

60

65

70

Age of Retirement in OECD Countries

Male

Female

Most Have Equalized or are Equalizing Retirement Ages for Men and Women

Only France has retirement age below 65 for men and women

Only Austria, Greece, Italy, and Switzerland maintain retirement age differences between men and women

ECA Region Retirement Ages

Albania

Armen

ia

Azerbai

jan

Belarus

Bosnia

FBIH

Bosnia

RS

Bulgari

a

Croatia

Czech R

epubli

c

Estonia

Georgi

a

Hunga

ry

Kazakh

stan

Kosov

o (UN 12

44)

Kyrgyz

stan

Latvia

Lithua

nia

Macedo

nia

Moldov

a

Monten

egro

Poland

Roman

ia

Russia

n Fede

ration

Serbia

Slovak

Repu

blic

Sloven

ia

Tajikis

tan

Turkey

Turkmeni

stan

Ukraine

50

52

54

56

58

60

62

64

66

MenWomen

Retirement Age Recommendations

Raise retirement age to 65 Equalize retirement ages for men and women Plan to raise higher in the future as life

expectancy rises– Notional account systems automatically reduce benefits as

life expectancy rises– Legislate automatic adjustment in retirement age as life

expectancy rises

Prevalence of Early Retirement

60+13%

1-5 years78%

5+ years9%

Women's Retirement in Poland, 2007

65+; 29%

1-5 years earlier; 50%

6-10 years;

5%10+ years; 16%

Men's Retirement Pattern in Poland, 2007

Few Penalties for Early Retirement

A few countries impose actuarial reductions on early pensions; most do not– Actuarial fairness would require reductions of about

6-7% of the pension per year of early retirement Some require additional contributions for

privileged occupations, but does not cover early retirement

Recommendations Eliminate early retirement

– Results in low pensions which then raises pressure to lift overall level of pensions

Impose actuarial reductions on pensions received early

Require additional contributions for early retirement, including to cover longer duration of retirement

Should Pensioners Share in Worker Wage Growth?

General view in the region that when wages rise, pensions should rise proportionately

Also the view originally in Europe – pensioners should share in growth

Found to be too expensive as the number of pensioners grew with aging

Now the prevalent approach is protecting the retiree’s purchasing power through inflation indexation and encouraging additional savings if the retiree wants more– Preferable to lowering the initial pension for the retiree and then adjusting to wage

growth because pensioner needs typically do not increase over retirement period

OECD Indexation Price Indexed

– Belgium, Canada, France, Iceland, Italy, Japan, Portugal, Spain, UK, US

Discretionary– Austria, Greece, Luxembourg,

Sweden 80% Price-20% Wage

– Finland 50% Price-50% Wage

– Switzerland Wage Indexed

– Denmark, Germany, Netherlands, Norway

Price; 10

Discretionary; 4

80-20; 1

50-50; 1

Wage; 4

ECA Indexation Price Indexed

– Azerbaijan, Serbia (?), Turkey, Uzbekistan Discretionary

– Albania, Armenia, Georgia, Kazakhstan, Russia

80% price-20% wage– Poland, Ukraine

2/3 price-1/3 wage– Czech Republic

50% price-50% wage– Croatia, Estonia, Hungary, Slovak

Republic, Bulgaria, Latvia, Macedonia, Moldova, Montenegro

100% wage– Belarus, Bosnia, Romania, Slovenia,

Tajikistan

Price; 4

Discretionary; 5

80-20; 2

2/3-1/3; 1

50-50; 9

25-75; 1

Wage; 5

Recommendation Move to inflation indexation as soon as

feasible Countries can legislate that some component

of wage growth will be included in the exceptional years when real wage growth exceeds 10%

Otherwise limit discretion since it creates uncertainty for pensioners

Generosity Varies in Region Some schemes provide modest benefits Others provide quite generous benefits, particularly in relation

to years of contribution – 50-60% of gross wage for as few as 25-30 years of service

OECD schemes might provide similar benefits for full pensions, but full pensions are only received after 45 years of contribution– OECD schemes are also typically not sustainable and will need to be cut further

Cannot compare euro equivalent of pensions across countries because cost of living, wages, and affordability vary across countries

OECD Accrual Rates

TurkeySpainMalta

PortugalItaly

AustriaFrance

LuxNetherlands

FinlandBelgium

KoreaSwedenIceland

SwitzerlandUS

HungaryGermany

NorwayJapan

CanadaUK

0 0.5 1 1.5 2 2.5 3 3.5

Accrual Rates in OECD Countries

Average accrual rate is <1.5% suggesting that a 45% benefit after 30 years of service is more appropriate than the 60-70% currently expected

Recommendation Expectations need to be adjusted so

that people understand that benefit rates from the past are not applicable in today’s world

Individuals need to understand that higher pensions will require higher personal saving

New Problem: Low Contributor Coverage Leads to Low Coverage of Future Elderly

OECD Coverage ECA Coverage in Selected Countries

Australi

a

Belgium

Denmark

France

Greece

Irelan

dJap

an

Netherl

ands

Portu

gal

Swed

en UK20

30

40

50

60

70

80

90

100

110

Albania

Croatia

Estonia

Hungary

Kyrgyz R

ep

Lithua

nia

Moldov

a

Romania

Slova

k Rep

Ukraine

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

Contributors of Today are Pensioners of Future

Governments will need to provide some resources for the elderly without access to pensions

Options:– Universal social pension– Means-tested social pension– Integration of elderly with or without pensions into

social assistance system

Future of Multipillar Reforms

Diversification of risk– Timing of shocks to financial asset prices considerably different than

timing of crisis on PAYG benefit levels Aging of population

– Benefit levels will likely fall further in the future– To maintain adequacy of benefits, will need to save either on

voluntary or mandatory basis But need to have adequate preparation

– Fiscal space– Adequate financial markets– Adequate supervision and regulation

Concluding Recommendations

Raise and equalize retirement ages Curb early retirement Focus indexation on protecting the purchasing power

of the elderly Publicize realistic expectations for future pensions Design and finance poverty alleviation for the non-

covered future elderly Careful planning necessary if adopting second pillars