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“A Comparison of Pension Reform in the EU – 27: What Lessons Can Be Learned?”
The Cicero Foundation
Paris, 10-11 May 2007
Mika Vidlund
Structure of the presentation
The need for pension reform – changing demographics
Pension reforms applied in the EU countries
How drastically do reforms affect the future pensions?
Concluding remarks
The change in old-age dependency ratio (65+/15-64) in the EU countries
15
20
25
30
35
40
45
50
55
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
EU15
EU25
EU10
Source: Eurostat 2005
The change in old-age dependency ratio (65+/15-64) and the situation in 2050
EU-25 averageSource: Eurostat
FRBE
UKLV
EE
DKSE
LU
NL
LTFI
MT
HU
DE
IT
BGEL PT
ATRO
CYIE
SI CZ
PL
ES
SK
30
35
40
45
50
55
60
65
70
30 50 70 90 110 130 150 170 190 210
Percentual change of elderly dependency ratio 2004-2050, %
Eld
erly
dep
ende
ncy
ratio
205
0, %
Public pension expenditure as a share of GDP between 2004 and 2050
4
5
6
7
8
9
10
11
12
13
14
2004 2010 2015 2020 2025 2030 2035 2040 2045 2050
% o
f G
DP
EU15
EU10
Source:EPC/AWG-calculations 2006
Public pension expenditure in the EU-25 countries in 2004 and in 2050, % of GDP
SKLT
LV
MT
CZ
HU
SI
CYPT
DK
BE
AT
FR
FIDE
LU
SE IENL
ES
EL
IT
UKPL
EE
2
4
6
8
10
12
14
16
18
20
22
24
-6 -4 -2 0 2 4 6 8 10 12 14
change by 2050, %-points
pen
sion
exp
endi
ture
205
0, %
of
gdp
Source: EPC/AWG-calculations 2006
EU-25 average
Risk category Country
Low-riskDK, EE, LV, LT, AT, PL, SK, FI, SE
Medium-risk BE, DE, ES, FR, IE, IT, LU, MT, NL, UK
High-risk CZ, EL, CY, HU, PT, SI
Long-term (up to 2050) sustainability of public finances in the EU Long-term (up to 2050) sustainability of public finances in the EU
Source: European Commission 2006
Financial sustainability of public pension systems according to synthesis reports (2006 and 2003)
“ No major challenges”
SE, UK EE, LV
“Moderate challenges”
FI, DK, DE, IT, FR, IRL , NL, AT LT, SK
”Important pressures”BE PL, MT
”Significant challenges” ES, PT, EL, LUCZ,CY, HU, SL
”well prepared”
SE, UK
”manageable”
FI, DK, BE, IRL, NL, LU, PT
”further reforms needed”
IT, DE
”…indeed needed”
EL, ES, FR, AT
Joint Report 2003
Joint Report 2006
II: Pension reforms applied in the EU-27 countries
Not an easy task: reform of the pension systems
Path-dependency
- Institutional factors, structure of the pension system itself, is a decisive precondition to the way reforms are enacted- Pension systems are like elephants: large, grey, very popular but difficult to move (Hinrichs 2000)
- ”Frozen welfare landscape” (Esping-Andersen 1996)
Continental/Corporatist welfare states most resistant to change- Earnings-related, generous benefits- Contributions are paid out of one’s own purse- Social partners have a decisive role – highly fragmented pension system - e.g. in France, Germany, Italy union consent has been decisive for previous
successful reforms
Some general trends among the variation of pension reforms
Tightening the link between contributions and benefits- Most visible in Italy and Sweden, likewise in Poland and Latvia- Countries with DB scheme: no more ”best years” or ”last years” principles
Implementation of individual pension accounts - Widely adopted especially in EU12 countries
Establishment of various sustainability factors or demographic factors
Changes in pension indexation rules- Cost of living index instead of wage index or increased weight of the inflation component in a mixed indexing formula or lower adjustment by incorporating parametric component in the formula (as ”sustainability factors” in Sweden and Germany)
Measures aiming at raising the effective retirement age- abolition of early retirement pathways, raising the retirement age or making it flexible
Prefunding of pensions
Value of pension assets in the EU countries in 2004, per cent of GDP
0
20
40
60
80
100
120
140
NL DK SE UK FI IE CY LU SK BE PT ES FR PL DE AT HU CZ IT EE SI LV LT
%
II pillar
I pillar
Source: AWG (2006); EFRP 2005; OECD 2005
In the EU-15 countries the majority of pension reforms can be labelled parametric. However…
Parametric reforms can be a crucial precursor for a more far-reaching paradigmatic reform as they change the liabilities under the old system and may thus pave the way for smoother transition to a new system and benefit structure (Holzmann et al., 2005; Hinrichs & Kangas, 2003)
A new kind of interplay between public and private pension systems can be found in some countries when studying the issue more deeply.
An example from Germany
Germany:
- the pension reform in 2001 with the introduction of a voluntary pension saving scheme (so-called Riester pension) has been described as a path-breaking law which will over time substantially alter the institutional logic of the pension system (Hinrichs 2002, 2004 and 2005; Lamping & Rüb, 2004; Schmähl, 2004; Börsch-Supan & Wilke, 2006)
- movement towards a new kind of public-private mix has further been strengthened by 2004 reforms with introduction of a sustainability factor slowing the pensions adjustment as well as establishment of target values for the contribution rate
An example from France
France- According to Palier (2000), governments in France have long preferred
to increase social contributions than to cut benefits.
- Parametric changes. However, with the reform of 2003 a link between the level of pension and average life expectancy was established. Lengthening the period required for a full pension in pace with average life expectancy and especially the use of price indexation in both basic and supplementary systems decrease significantly the future pension level.
Market based approach in UK and Ireland
UK:- Opting out system. The attractiveness to opt out was raised by parametric reforms in 1986- stakeholder pensions 2001- SERPS was replaced by S2P in 2002 (MIG, Pension Credit) - Plans for moving the S2P towards a flat-rate scheme- New scheme of personal accounts in the near future?
Ireland: - Flat-rate statutory pension system - PRSA were introduced in 2002- The government has raised the basic pension significantly
Twofold pension strategy: the target is to shift pension provision to the private schemes while guaranteeing adequate incomes for the poorest pensioners
Path-breaking reforms in Sweden and Italy
Italy established NDC reform in 1995 and Sweden in 1999
In Sweden fully funded individual pension accounts
Italy is also launching individual pension accounts through the new TFR system starting from 2008
Changeover to the new system in Italy will be much slower and changes in life expectancy will not be taken into account annually but only after discussions once every 10 years
Multipillar reforms in the new EU countries
Several new Member States play an important role as “testing ground” for the ’second pillar’ pension reform
Also ”newcomers” have adopted mandatory individual pension accounts (2nd pillar) - Romania in 2006; contributions to the private savings accounts to begin in 2008- In Bulgaria a new system consisting of 2nd pillar individual accounts was implemented in January 2002
Individual pension account component much larger in the new EU countries than in Sweden
III: How drastically do reforms affect the future pensions?
Theoretical gross pension replacement rates in the EU-15 countries in 2005 and projected for 2050, %
0
20
40
60
80
10020
05
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
UK IE FI SE DK DE FR BE LU NL AT IT PT ES EL
% o
f ave
rage
ear
ning
s
Public pensions Occupational pension (II-pillar)
Theoretical gross pension replacement rates in the EU-10 countries in 2005 and projected for 2050, %
0
20
40
60
80
100
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
2005
2050
CZ EE CY LV LT HU MT PL SI SK
% o
f ave
rage
ear
ning
s
Public pensions Occupational pension (II-pillar)
What lessons can be learned?
There is no single roadmap, no “one size fits all,” what comes to pension reform.
Institutions do matter – continuity in pension policy is a visible phenomenon when countries develop their pension systems
However not even traditional Bismarckian countries have stayed intact – substantial changes come as a result of incremental steps
In many countries the income composition of the retiree will change – towards multipillar approach, shift of reliance to ”new players”
Defined-contribution savings accounts are high on the pension reform agenda. However, a range of variation in the role of the state, individual’s freedom of choice, the provision of minimum pensions, overall coverage, regulation, investment rules and benefit guarantees
Pension reform policy is a ”never-ending story”
EU can afford to grow old
According to EPC/AWG report 2006:
- There are grounds for being optimistic that the EU can afford to grow old. Reforms work and many EU countries have made real progress in recent years
- Ageing pushes up spending in the coming decades. However, other factors such as increase in the employment rate, tightened eligibility rates and declining relative benefit level will offset part of the demographic pressure.
- In the EU15, these factors are projected to curtail some 70% of the pressure caused by demographic developments alone, and in the EU10 they would offset almost all the demographic pressure.