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