Going backwards? Analysis of the reversal of systemic pension reforms in Central and Eastern Europe...

Going backwards?Analysis of the reversal of systemic pension reforms in Central and Eastern Europe

Edward WhitehouseHead of Pension Policy Analysis

Social Policy divisionOECD

2

Reformed systems: parameters

Type of public scheme

DC contribution rate

Reduction in earnings-related

benefit

Estonia Basic + points 4+2% 20%

Hungary DB 68% 26%

Poland NDC 7.3% 37%

Slovak Republic Points 9% 50%

Latvia NDC 210% 44%

Lithuania Basic + DB 3.55.5% 52%

Switching behaviour

0%

25%

50%

75%

100%

20 25 30 35 40 45 50 55 60 65

men

women

Estonia 2005

switc

h p

roh

ibite

d

0%

25%

50%

75%

100%

20 25 30 35 40 45 50 55 60 65

men

women

Hungary 2000

0%

25%

50%

75%

100%

20 25 30 35 40 45 50 55 60 65

men

women

Poland 1999

switc

h

pro

hib

ited

switc

h m

an

da

tory

Slovak Republic 2005

0%

25%

50%

75%

100%

20 25 30 35 40 45 50 55 60 65

40

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related

0

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related

Reformed systems: replacement rates

0

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related Basic

EU-27 average

OECD-34 average

Estonia Hungary

Slovak Republic

0

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related

Poland

50

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related

0

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related Basic

0

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related

0

.25

.5

.75

1

1.25

Gro

ss r

epla

cem

ent

rate

0 .25 .5 .75 1 1.25 1.5 1.75 2Individual earnings, proportion of average earnings

DC Earnings-related

Reformed systems: replacement rates

EU-27 average

OECD-34 average

Bulgaria Latvia

Lithuania Romania

6

Distributional impact of reform: Poland

0

25

50

75

0.5 0.75 1 1.25 1.5Individual earnings

(multiple of economy-wide average)

Gross replacement rate(per cent)

Post-reform

Post-reform

Reduction in replacement rate

Pre-reform

Pre-reform

Reduction in replacement rate

Increase in replacement rate

7

Switching and reform reversals:replacement rates

Replacement rates (%) Changes in

pensions (%) Switcher

Non-

switcher Total Public

Public Private Total

Public pension pension

Estonia 25.9 15.0 40.9

29.2 -28.5 +13.1 Hungary 44.4 31.4 75.8

60.1 -20.8 +35.2

Poland – men 23.4 30.2 53.7

37.4 -30.3 +59.7 Poland – women 17.6 22.1 39.7

28.1 -29.3 +59.7

Slovak Republic 26.0 31.6 57.5

51.9 -9.7 +100.0

Poland: impact of changes on replacement rate

8

0

10

20

30

40

50

60

Before After Before After

Gross replacement rate, per cent

Men WomenTotal 53.7%

Total45.2% Total

39.7%Total 33.6%

9

Switching and reform reversals:replacement rates

Results based on OECD standard assumptions

2% earnings growth

3.5% net investment return

both in real terms

What matters for replacement rate from defined-contribution schemes is difference between earnings growth and investment return

Calculate neutral rate of return that equalises replacement rates

Wage growth – 5% for Estonia

Wage growth – 1.6% for Hungary

Wage growth – 2.0% M, – 2.3% F for Poland

Wage growth + 0.6% for Slovak Republic

10

Slovak Republic

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

Long-term financial projections

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

Estonia Hungary

Poland

110

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

0

2.5

5

7.5

10

12.5

15

17.5

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Per cent of GDP

Public

Private

Romania

Long-term financial projectionsBulgaria Latvia

Lithuania

12

Conclusions: the OECD vision for retirement-income provision

Pension policy is about achieving a balance between adequacy and sustainability

A balanced pension system is a good thing

A mix of public and private provision

A mix of pay-as-you-go and pre-funding

A redistributive pension system is a good thing

With fiscal constraints, best to target public benefits on those most in need