outline of presentation i. key challenges for pension …. key challenges for pension systems...

I. Key Challenges for Pension Systems

• Sustainability challenges

• Equity challenges

II. Reforms for Sustainability Challenges

• Parametric / structural reforms

• Built-in measures coping with uncertainties

III. Reforms for Equity Challenges

• Expanding pension coverage

• Growth-friendly reform

2

Outline of Presentation


• Sustainability challenges

– Declining fertility leads to a demographic transition,

gradually reducing the ratio of workers to pensioners.

– Furthermore, improvements in longevity increases the

number of years over which pensions are paid.

– This transition toward an older population profile

increases pension spending to GDP and may crowd

out other public expenditure.

3

4

pe

rce

nt

of

GD

P

Source: IMF Fiscal Monitor (April 2016).

Public pension spending is projected to rise in advanced economies.

(change in public pension spending, 2015-50, in percent of GDP)


-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

KO

RN

ZLSV

NLU

XES

PB

ELD

EUH

KG

IRL

USA

SGP

NLD

AU

SLT

UN

OR

MLT

SVK

CH

EIS

RC

AN

AU

TC

ZEG

BR

PR

TIS

LJP

NC

YP

FIN

ITA

EST

SWE

GR

CLV

AFR

AD

NK

2015-2030

2030-2050

Source: IMF Fiscal Monitor (April 2016).

pe

rce

nt

of

GD

P

5

Public pension spending will also rise in many emerging economies.

(change in public pension spending, 2015-50, in percent of GDP)


-5.0

0.0

5.0

10.0

15.0

20.0

KW

T

BR

A

IRN

AZ

E

UK

R

SA

U

CH

N

VE

N

TH

A

BL

R

AR

G

RU

S

EC

U

OM

N

UR

Y

PE

R

AR

E

KA

Z

LK

A

ZA

F

EG

Y

MY

S

PA

K

IDN

PH

L

DO

M

RO

M

IND

HU

N

ME

X

PO

L

CH

L

TU

R

CO

L

HR

V

2015-2030

2030-2050

Source: Equitable and Sustainable Pensions (2014). 6

4.3

-1.2 -0.7

-0.9

-6

-4

-2

0

2

4

6

Aging Eligibility Replacementrate

Labor forceparticipation

pe

rce

nt

of

GD

P

2010-2030

Aging will remain the main driver of spending growth in advanced economies.


Source: Equitable and Sustainable Pensions (2014). 7

pe

rce

nt

of

GD

P 3.7

-2.1

-0.5 -1.1

-6

-4

-2

0

2

4

6

Ag

ing

Elig

ibilit

y

Re

pla

cem

en

tra

te

La

bo

r fo

rce

pa

rtic

ipa

tio

n

Emerging Europe

2.1

-0.3 -0.5

-0.2

-6

-4

-2

0

2

4

6

Ag

ing

Elig

ibilit

y

Re

pla

cem

en

tra

te

La

bo

r fo

rce

pa

rtic

ipa

tio

n

Other Emerging

2010-2030

Aging is also the main driver of expenditure growth in emerging economies.



• Equity challenges

– When designed properly, pensions can be a powerful

tool to combat old-age poverty and address

inequities.

– But outside of Europe and the Advanced Economies,

a relatively large portion of the population is not

covered by public retirement income schemes.

– In Asian countries, equity considerations seem crucial

in the context of the observed rising income inequality

since the 1990s.

8


9

Since 1990s, rising income inequality has been observed in Asian countries.

Source: Regional Economic Outlook: Asia and Pacific, April 2016


10

Coverage of public pension system stays at a low level in Asian countries.

Source: Regional Economic Outlook: Asia and Pacific, April 2016.

• Types of public pension reforms for

sustainability challenges:

– Parametric Reforms

• Changes in parameters of public pension systems,

such as:

– Eligibility conditions (age and others)

– Benefit calculation methods

– Contribution rate / base

– Structural Reforms

11



• Two measures to cope with

sustainability challenges within public

pension system:

– Reducing benefit, or curtailing eligibility

– Increasing contribution

(or other available resources)

12


• Reducing benefit:

– Reduction of benefit accrual rates

• Contain initial pension levels

– Tighter indexation rules

• Contain existing pension benefits

• Wage > CPI > CPI - further adjustment

– Claw back benefits for high earners

• Possibly through a progressive tax system

13


• Curtail eligibility:

– Higher pensionable age:

• Slower inflow of beneficiaries (longer contribution

period), shorter retirement periods

• Potential positive impact on labor supply and

growth

• Help maintain replacement ratios

– Actuarial decrements/increments:

• Decrements for early retirements

• Increments for later retirements (combined with

benefit reduction) 14


• Increasing contribution:

– Higher contribution rates:

• Possible negative impact on labor market, inter-

generational fairness – dependent on design

– Broadening contribution base:

• Increase the cap on incomes, or lower the floor

subject to contributions

– Improving compliance

15


Trade-offs across Reform Options to Stabilize Spending, 2010-30

Red

uc

tio

n i

n b

en

efi

ts (

pe

rce

nt)

Source: The Challenge of Public Pension Reform in Advanced and Emerging Market Economies, 2012 16


• Structural reforms:

– Financing mechanism

• PAYG (pay-as-you-go) / Funded

• Public / Private?

– Links between contribution and benefit /

Changes in coverage

• Contributory / Non-contributory (tax financed)

• Degree of redistribution within pension system

• DB / DC?

17


– Reforms for sustainability challenges may

have:

• Impacts on income distribution and adequacy (by

lower benefit, later pension age)

– May make pension system less progressive, as rich live

and can work longer than the poor

• Impacts on labor participations (by higher

contribution)

– If higher contribution is not linked to higher benefit, it

works as higher tax on labor supply.

18


– Sustainability challenges can be mitigated by:

• Higher labor participation

• Higher fertility rate, immigration

• Higher economic growth (higher productivity)

• Higher financial returns of buffer funds

– But, unfavorable changes in these factors

may require further reforms.

19

• Pension systems must be resilient to uncertainty.

– Past demographic projections have been subject to large

errors.

20

5

10

15

20

25

1950 1960 1970 1980 1990 2000 2010

More developed countries: crude birth rate

(births per 1,000)

5

10

15

20

25

1950 1960 1970 1980 1990 2000 2010

Less developed countries: crude mortality rate (deaths per 1,000)

1963 Proj 1982 Proj 1990 Proj 2000 Proj 2012 Proj Actual


Source: The Fiscal Consequences of Shrinking Populations, 2015

• Improvements in longevity can have an important

fiscal impact

21

-5.0

0.0

5.0

10.0

15.0

20.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2050 2100 2050 2100 2050 2100 2050 2100

More developed Less developed Japan China

Higher longevity scenario(change from baseline, percentage points of GDP)

Pension (left axis) Health (left axis) Old-age dependency ratio (right axis)

Pe

rce

nta

ge p

oin

ts o

f G

DP

Old

-age

de

pe

nd

en

cy r

atio




• The impact of lower fertility rates on fiscal variables

is significant

22

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2050 2100 2050 2100 2050 2100 2050 2100

More developed Less developed Japan China

UN Low fertility scenario(change from baseline, percentage points of GDP)

Pensions (left axis) Health (left axis) Old-age dependency ratio (right axis)

Pe

rce

nta

ge p

oin

ts o

f G

DP

Old

-age

de

pe

nd

en

cy r

atio


• Measures for unexpected changes:

– Improve transparency and governance

• Regular sustainability check

• Stress test / risk scenario analyses

• Better communication to the public

• Enhance ‘reactive’ measures based on

households’ preference

– Automatic adjustment mechanisms

• To enhance necessary reforms timely and

smoothly 23


– Automatic adjustment mechanism coping with

demographic uncertainties:

• ‘NDC’ (notional defined contribution) system by

Sweden:

– ‘Annuity Devisors’ reflecting longevity of each generation

– ‘Balancing’ notional rate reflecting other uninsurable

uncertainties

• A special indexation rule by Japan:

– ‘Macroeconomic indexation’ on pensionable income and

benefit reflecting longevity and lower contribution

• Automatic adjustment for pension age by Denmark:

– Retirement age is reviewed every five years

24



• Two measures to cope with equity

challenges within public pension

system:

– Expanding contributory pension system

– Introducing / expanding non-contributory

pension system (social pension)

25


• Expanding contributory system:

– Unify fragmented schemes:

• Eliminate preferred status for particular social

groups

• Help flexibility of labor market by ensuring

portability of past contribution history

– Coverage expansion:

• Ensuring access to contributory public pension

systems by wider workers / non-workers

26


– Coverage expansion of contributory systems

may face:

• Difficulty in measuring pensionable income

correctly and keeping contribution records

– Especially for self-employed and informal workers

– Flat contribution collection is an option

• Difficulty in provide adequate pensions to low

earners, if benefits are strictly linked to contribution

history

– Matching contribution / benefit financed by tax is an

option

27


• Non-contributory pension system

(social pension):

– Flat pension (cash transfer) financed by

general tax

• Contribution history does not affect pension

amount

• Easy to manage with limited administrative

capacity for measuring income / keeping records

– Effective to poverty alleviation

28


– Can be provided with means tests for

targeting

• Contributory pension test

• Other income test

• Asset test

– Can be provided as a social assistance,

different from public pension system

– Need to take into account fiscal constrains

29


• Equity challenges can be mitigated by:

– Increase in formal sector labor participation

– Equal treatments in labor markets between

regular/irregular employment contracts,

male/female workers

– Providing social assistance programs (similar

to non-contributory pensions) for poverty

alleviation

30


– ‘Non-contributory system’ can work as…

• A disincentive for informal workers to participate in

contributory pension systems

• A disincentives for formal employment contracts

for employers and employees

– An appropriate combination and balance is

the key for design, especially in countries with

substantial informal / self-employed workers

31

Concluding Remarks

• Trade-offs are salient in designing

public pension system, especially

between...

– Sustainability and Adequacy

– ‘Horizontal Equity’ and ‘Vertical Equity’

32

• Rising public pension spending is an

important fiscal challenge, and uncertainties

about future demographic pose difficulties.

• ‘Work longer’ will help sustainability of

pension systems and economic growth in

aging societies.

• Well-designed automatic adjustment

mechanisms will help necessary adjustments

for sustainability in a timely manner.

Concluding Remarks

33

• Low pension coverage remains an important

equity challenge in many Asian countries.

• Expansion of both contributory /

non-contributory systems are necessary, but

need clear strategies to distinguish their

roles.

• Growth enhancing revenue mobilization and

administrative / institutional capacities are

the key for determining strategies.

Concluding Remarks

34

outline of presentation i. key challenges for pension …. key challenges for pension systems...

Documents