Pension Systems Pension Systems in Central and Eastern Europe: in Central and Eastern Europe: in times of Crisis, Austerity and Beyond in times of Crisis, Austerity and Beyond 31 March 2011, Prague 31 March 2011, Prague Kenichi Hirose Kenichi Hirose Senior Specialist in Social Security Senior Specialist in Social Security ILO Decent Work Technical Support Team ILO Decent Work Technical Support Team for Central and Eastern Europe for Central and Eastern Europe Email: [email protected]Email: [email protected]. .
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Pension Systems in Central and Eastern Europe: in times of Crisis, Austerity and Beyond 31 March 2011, Prague Kenichi Hirose Senior Specialist in Social.
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Pension SystemsPension Systemsin Central and Eastern Europe:in Central and Eastern Europe:
in times of Crisis, Austerity and Beyondin times of Crisis, Austerity and Beyond
31 March 2011, Prague 31 March 2011, Prague
Kenichi HiroseKenichi HiroseSenior Specialist in Social SecuritySenior Specialist in Social Security
ILO Decent Work Technical Support TeamILO Decent Work Technical Support Teamfor Central and Eastern Europefor Central and Eastern Europe
Provide adequate income security for the Provide adequate income security for the elderlyelderly
Basic requirementsBasic requirements
Sustainable in the long runSustainable in the long run
Credible for the commitment of future Credible for the commitment of future generationsgenerations
Pension reform addresses these issues Pension reform addresses these issues while ensuring the main objective of the while ensuring the main objective of the retirement income provisionretirement income provision
Trends of Pension Reforms in CEE countries Early 1990sEarly 1990s
Pension system was used to resolve the unemployment problemPension system was used to resolve the unemployment problem Rapid deterioration of the system demographic dependency Rapid deterioration of the system demographic dependency
From mid-1990s to mid-2000sFrom mid-1990s to mid-2000s Reform adopting a Chilean type mandatory private funded Reform adopting a Chilean type mandatory private funded
pension pillar by scaling down the state pensionpension pillar by scaling down the state pension Parametric changes to tighten benefits (longer insurance period, Parametric changes to tighten benefits (longer insurance period,
higher retirement age, indexation from wage to price) higher retirement age, indexation from wage to price) From 2008 to presentFrom 2008 to present
Global economic crisis affected public and private pensionsGlobal economic crisis affected public and private pensions Pressure to cut benefits in the context of fiscal consolidation in Pressure to cut benefits in the context of fiscal consolidation in
Europe (especially the countries receiving financial assistance)Europe (especially the countries receiving financial assistance)
Typology of pension schemesTypology of pension schemes
Central administrationCentral administration RenationalRenationalizationization
Annuity Annuity paymentpayment
Central Central registryregistry
Questions on the multi-pillar pension reforms
Are the objectives of the multi-pillar reform appropriate?Are the objectives of the multi-pillar reform appropriate? Primary goals: Protection against poverty in old-agePrimary goals: Protection against poverty in old-age Secondary goals: Bolster economic growth through increased savingsSecondary goals: Bolster economic growth through increased savings
Did countries meet initial conditions on macroeconomic stability, financial Did countries meet initial conditions on macroeconomic stability, financial market readiness, moderate indebtedness, and a low risk for corruption?market readiness, moderate indebtedness, and a low risk for corruption?
Many countries had poor records at the time of reform.Many countries had poor records at the time of reform.
Have the reform considered options to expand the coverage to those outside Have the reform considered options to expand the coverage to those outside the formal pension system? the formal pension system?
Have multi-pillar reforms achieved the intended macroeconomic impact Have multi-pillar reforms achieved the intended macroeconomic impact such as risk diversification in investment portfolio, increased savings, such as risk diversification in investment portfolio, increased savings, capital markets development, better labour market incentives?capital markets development, better labour market incentives?
These objectives remain largely unrealized.These objectives remain largely unrealized. Fiscal deficits have grown in many countries.Fiscal deficits have grown in many countries.
Misleading terminologiesMisleading terminologies ““Parametric reforms” versus “paradigmatic reforms”Parametric reforms” versus “paradigmatic reforms” ““Single-pillar” versus “multi-pillar” reformsSingle-pillar” versus “multi-pillar” reforms
Problems with “Pillar II” system Unpredictability of the future benefit level facing the volatile Unpredictability of the future benefit level facing the volatile
financial market riskfinancial market risk Limited redistribution results in more inequality (e.g. gender Limited redistribution results in more inequality (e.g. gender
inequality)inequality) Not enough attention is given to the payment phase, in Not enough attention is given to the payment phase, in
particular the private market provision of life annuities and particular the private market provision of life annuities and full indexation of benefits full indexation of benefits
High administrative costs by private funds High administrative costs by private funds Transitional costs: The “gap” in the financing of the Pillar I Transitional costs: The “gap” in the financing of the Pillar I
system created by diverting part of the contributions to the system created by diverting part of the contributions to the new Pillar II systemnew Pillar II system
Transition cost will increase government spending Transition cost will increase government spending (borrowing) in short- to medium-term.(borrowing) in short- to medium-term.
Donor dependence: CEE and CIS
Countries with mandatory funded pillarsCountries with mandatory funded pillars Countries with PAYG pensions Countries with PAYG pensions
CountryCountry Amount of loans in Amount of loans in $ million$ million
CountryCountry Amount of loans in Amount of loans in $ million$ million
Source: Independent Evaluation Group – World bank, “Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance”, 2006
Direct impact of the crisis on pension systems: some lessons learned
The crisis affected different categories of pension schemes in The crisis affected different categories of pension schemes in different ways. One lesson learned is the sensitivity of pension different ways. One lesson learned is the sensitivity of pension levels in fully-funded defined-contribution schemes with respect levels in fully-funded defined-contribution schemes with respect to the financial market volatility and the way its consequences to the financial market volatility and the way its consequences had to be borne by workers (private pension funds in OECD had to be borne by workers (private pension funds in OECD countries lost 23% of assets in 2008). countries lost 23% of assets in 2008).
In defined-benefit pay-as-you-go pension systems, the In defined-benefit pay-as-you-go pension systems, the immediate impact will be less severe than in fully-funded immediate impact will be less severe than in fully-funded pension systems. However, long-term contraction of pension systems. However, long-term contraction of employment will also affect the pay-as-you-go pension system. employment will also affect the pay-as-you-go pension system.
The crisis hit different generations. The most affected are The crisis hit different generations. The most affected are workers who are close to retirement, those with long periods of workers who are close to retirement, those with long periods of membership in the funded pension schemes, and in particular membership in the funded pension schemes, and in particular those whose investment portfolio is exposed to riskier assets those whose investment portfolio is exposed to riskier assets such as stocks. Those pensioners in private pension plans who such as stocks. Those pensioners in private pension plans who did not take annuities upon retirement were also seriously did not take annuities upon retirement were also seriously affected. affected.
Government debts and deficits in EU 27 countries, 2009
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0-20.0
-15.0
-10.0
-5.0
0.0
5.0
Esto
nia
Luxe
mbo
urg
Bulg
aria
Rom
ania
Lith
uani
a
Czec
h Re
publ
ic
Slov
enia
Slov
akia
Latv
ia
Den
mar
k
Swed
en
Finl
and
Pola
nd
Spai
n
Cypr
us
Net
herl
ands
Irel
and
Aus
tria
Uni
ted
King
dom
Mal
ta
Ger
man
y
Port
ugal
Fran
ce
Hun
gary
Belg
ium
Italy
Gre
ece
Deficit/GDP in % Debt/GDP in %
Debt 2009 Deficit 2008 Deficit 2009
Ratio of pension contributions to the expenditure, 2007-09
After the crisis, governments impose fiscal austerity, After the crisis, governments impose fiscal austerity, in particular countries receiving emergency financial in particular countries receiving emergency financial assistance from IMF and EU (e.g. Greece, Hungary, assistance from IMF and EU (e.g. Greece, Hungary, Latvia, Romania, Ukraine)Latvia, Romania, Ukraine)
Pension system was particularly vulnerable due to its Pension system was particularly vulnerable due to its large dependence on government budget to cover the large dependence on government budget to cover the deficit (partly caused by transition costs associated deficit (partly caused by transition costs associated with Pillar II system) with Pillar II system)
Severe cuts in pension rights motivated by reducing Severe cuts in pension rights motivated by reducing government deficits caused serious social uprisings government deficits caused serious social uprisings (e.g. France, Greece, Spain) (e.g. France, Greece, Spain)
National responses in 2009-2011: convergence or divergence ?
Thereafter move Thereafter move to price by 2030to price by 2030
SwissSwiss From net wageFrom net wage
toto
70% net wage 70% net wage + 30% price+ 30% price
Price +Price +
1/3 real wage1/3 real wage
Contribution Contribution raterate
No more No more transfer to transfer to PII PII
State 12%State 12%
Decrease 2% Decrease 2% in 2010in 2010
Increase Increase 1.8% in 20111.8% in 2011
-- -- -- Decrease Decrease 5%5%
Pillar II Pillar II pension pension
De facto De facto renationalizatrenationalizationion
Increase Increase cont. from cont. from 5% to 7% in 5% to 7% in 20172017
Gradual Gradual increase cont. increase cont. from 2.5% to from 2.5% to 6% by 20166% by 2016
-- Mandatory Mandatory only for only for workers in workers in hazardous jobshazardous jobs
Introduction Introduction with 3%with 3%
Tensions related to pension reforms Initial conditionInitial condition Demographic trendsDemographic trends Socio-economic changesSocio-economic changes Budgetary pressure (MOF, EU, IMF)Budgetary pressure (MOF, EU, IMF) Competitiveness pressureCompetitiveness pressure Political inertia (protecting vested rights)Political inertia (protecting vested rights) Political interference (populist measures related to Political interference (populist measures related to
election) election) Pressure from interest groupsPressure from interest groups Supra-national coordination (EU)Supra-national coordination (EU) Loopholes (non-declaration, evasion) with weak controlLoopholes (non-declaration, evasion) with weak control Erosion of trust by the public, in particular by young Erosion of trust by the public, in particular by young
Sustainability and adequacySustainability and adequacy
How to safeguard the adequacy of pensions? What How to safeguard the adequacy of pensions? What is the minimum standard? (Cf. ILO Convention 102, is the minimum standard? (Cf. ILO Convention 102, Social Protection Floor initiative)Social Protection Floor initiative)
How to achieve a new Work-Retirement balance in How to achieve a new Work-Retirement balance in a changing life cycle? a changing life cycle?
How to secure reliable and necessary resources to How to secure reliable and necessary resources to finance the pension expenditure? What is the role of finance the pension expenditure? What is the role of diversification?diversification?
Since a public pension system relies on the Since a public pension system relies on the intergenerational transfer (solidarity), its sustainability intergenerational transfer (solidarity), its sustainability critically depends on whether the working generation is critically depends on whether the working generation is committed to pay contributions for the elderly committed to pay contributions for the elderly generation.generation.
Issues in future pension reforms (1)
Extending the coverage through improved law compliance and efficient Extending the coverage through improved law compliance and efficient contribution collections not only extend the contribution base but also contribution collections not only extend the contribution base but also reduce the elderly persons with low or no pension.reduce the elderly persons with low or no pension.
The policy making process is an important aspect of pension reform. The The policy making process is an important aspect of pension reform. The reform process should seek to build a national consensus on a package of reform process should seek to build a national consensus on a package of measures acceptable to all stakeholders.measures acceptable to all stakeholders.
Tripartite and social dialogue is of fundamental importance in the policy Tripartite and social dialogue is of fundamental importance in the policy making process. In order to find a solution for balanced reform package, key making process. In order to find a solution for balanced reform package, key stakeholders should exhibit willingness to make a pragmatic compromise, stakeholders should exhibit willingness to make a pragmatic compromise, rather than protecting vested rights or persisting to the competitiveness rather than protecting vested rights or persisting to the competitiveness argument. The proposed reform should be supported by the future argument. The proposed reform should be supported by the future contributing generations. contributing generations.
Implementation of pension reform measures requires a sufficiently long Implementation of pension reform measures requires a sufficiently long transition period to avoid abrupt changes in the life plans of workers close to transition period to avoid abrupt changes in the life plans of workers close to retirement. In addition, the demographic dependency is projected to worsen retirement. In addition, the demographic dependency is projected to worsen from around 2020. Therefore, it is crucial that policy makers should take from around 2020. Therefore, it is crucial that policy makers should take proactive steps to implement the reform measures to ensure the long-term proactive steps to implement the reform measures to ensure the long-term viability of the system. viability of the system.
Issues in future pension reforms (2)
Thank you for your attention
For further information, please visit our webpage at
www.ilo.org/secsocwww.ilo.org/budapest
Recent literature on pension reformRecent literature on pension reform World Bank, “Averting the old-age crisis”, 1994World Bank, “Averting the old-age crisis”, 1994 Beattie, R and McGillivray W, “A risky strategy”, ISSR, 1995Beattie, R and McGillivray W, “A risky strategy”, ISSR, 1995 Stiglitz, J. E. and Orszag. P.R., “Rethinking Pension Reform: Ten Stiglitz, J. E. and Orszag. P.R., “Rethinking Pension Reform: Ten
Myths about Social Security Systems”, 1999 (in H-S below)Myths about Social Security Systems”, 1999 (in H-S below) Holzmann, R. and Stiglitz, J. E. (eds.), “New ideas about old age Holzmann, R. and Stiglitz, J. E. (eds.), “New ideas about old age
security”, 2001security”, 2001 Barr N, “Reforming Pensions: Myths, Truths and Policy Choices”, IMF Barr N, “Reforming Pensions: Myths, Truths and Policy Choices”, IMF
Working paper, 2000 (ISSR 2002)Working paper, 2000 (ISSR 2002) Gillion et al., “Social Security Pensions: Development and Reform”, Gillion et al., “Social Security Pensions: Development and Reform”,
2000, ILO/ISSA.2000, ILO/ISSA. ILO, “Social security: a new consensus”, 2001ILO, “Social security: a new consensus”, 2001 Holzmann R. and Hinz R. (eds.) “Old Age Income Support in the 21st Holzmann R. and Hinz R. (eds.) “Old Age Income Support in the 21st
Century”, 2005Century”, 2005 Holzmann R. and Palmer E. (eds.), “Pension reform: issues and Holzmann R. and Palmer E. (eds.), “Pension reform: issues and
prospects for non-financial defined contribution (NDC) schemes”, prospects for non-financial defined contribution (NDC) schemes”, 2006.2006.
Barr N and Diamond P, “Reforming pensions”, Nov 2008 Barr N and Diamond P, “Reforming pensions”, Nov 2008