- Benedict Clements, David Coady, Frank Eich, Sanjeev Gupta, Alvar Kangur, Baoping Shang, and Mauricio Soto
- Published Date:
- January 2013
Public Pension Expenditure Identity
Population aging is typically measured by the old-age dependency ratio (the ratio of the population 65 and older to the population ages 15–64). Eligibility refers to the number of pensioners as a proportion of the population 65 years and older; this factor depends on the qualifying conditions for a pension, particularly the statutory retirement age and the possibility of early retirement. Replacement rates—the ratio of average pensions to average earnings—capture the generosity of pension benefits. Finally, changes in labor force participation rates affect both the numerator—increases in labor force participation today can affect future eligibility and replacement rates—and the denominator—higher labor force participation implies higher GDP. Box A1.1 sets out the public pension expenditure identity.
Using this simple identity, it is possible to calculate the change in pension spending as a share of GDP between two years (t1 and t2). For any year t, let O(t) be the old-age dependency ratio, E(t) be the pensioners ratio, G(t) be the replacement rate, and L(t) be the inverse of the employment ratio. Assuming a constant total compensation share in GDP over time, then
Data Sources and Calculations
For Organisation for Economic Co-operation and Development (OECD) economies (Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, the United States) 1980–2007 data are from the OECD Social Expenditure Statistics database (www.oecd-ilibrary.org/content/data/data-00167-en). This spending includes cash benefits for old-age, survivor, and disability pensions.
Box A1.1.Public Pension Expenditure Identity
PE = pensioners * average pension.
For some countries, public spending includes spending on special pension plans for public employees, including civil servants, sub-national-government employees, teachers, and members of the armed forces, which often follow special rules (including in Austria, Belgium, France, Greece, Germany, Portugal, and the United States). For Canada, these figures do not include the teachers’ pension plans. For Mexico the OECD data do not include state government plans. Earlier data (1970–79) for the majority of these countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States) come from Holzmann (1988). For the other OECD countries (Chile, Hungary, Iceland, Luxembourg, Mexico, Poland, Turkey), data for 1970–79 are imputed based on data from the International Labour Organization’s (ILO’s) The Cost of Social Security(various years). For in-between years without observations, spending figures are estimated using a linear interpolation between the two observed points.
For Bulgaria, Latvia, Lithuania, and Romania, the primary source of data for 1990–2008 is the ESSPROS (European System of Integrated Social Protection Statistics) from Eurostat. For these countries, data for 1970–89 are imputed based on data from the ILO’s The Cost of Social Security. For in-between years without observations, spending levels are estimated using a linear interpolation between the two observed points.
For other emerging market economies, the most recent spending as a share of GDP comes from IMF documents (Colombia, Egypt, Jordan, Saudi Arabia), country authorities’ estimates (Argentina, Brazil, China, India, Indonesia, Pakistan, the Philippines, Russia, South Africa, Thailand, Ukraine), or the ILO’s World Social Security Report 2010/11(Malaysia). For some countries, these data might include social security spending other than pensions (Brazil). Because these data provide few data points, the years before 2010 are imputed based on demographics:
When data for 1990 and beyond are not available for these countries, they are imputed based on data from the ILO’s The Cost of Social Security. For in-between years without observations, spending figures are estimated using a linear interpolation between the two observed points.
Projected Pension Spending, 2010–50
The latest available number (from the OECD, European Commission, Eurostat, ILO, IMF, World Bank documents, or country authorities’ estimates as explained above) is the starting point for the projections. Spending is projected based on the authorities’ estimates when these are available (Table A5.7). For most European economies, the authorities’ projections are available in their latest Stability and Convergence Programmes (available at http://ec.europa.eu/economy_finance/economic_governance/sgp/convergence/programmes/2011_en.htm). These reflect in part efforts by the European Commission and the EU Economic Policy Committee to construct consistent projections for many European economies (European Commission Directorate General for Economic and Financial Affairs and the Economic Policy Committee, 2009). The methodology applies the rate of increase of the share of GDP in the authorities’ estimates to the initial spending point. For example, for countries for which the latest data point available is from the OECD for 2007, and for which the authorities’ estimates for 2007, 2010, and 2030 are available, the projections for 2010 and 2030 are calculated as follows:
For cases in which the authorities’ estimates start after the latest observed figure, the spending figure is projected forward using demographic changes only. For example, if the last actual observed year of spending is for 2007, and the authorities’ estimates start in 2008, then
Of course, this methodology suggests that the spending figures may not always match the authorities’ figures because of the use of a different base—OECD pension spending might differ from official estimates because of broader coverage of pension spending. For example, for the United States, OECD pension spending includes spending in state and local plans, while the authorities’ estimates include only the national social security plan. Nevertheless, the advantage of this methodology is that it provides a relatively similar definition of spending (the OECD definition) that allows for cross-country comparisons.
For countries without readily available projections—mostly for the emerging market economies outside Europe—projected spending reflects the impact of changing demographics and is adjusted to account for reforms (Brazil, Chile, Colombia, Egypt, Jordan, Mexico) that would affect replacement rates and eligibility ratios. When no information about reforms is available (Argentina, China, Indonesia, Malaysia, Pakistan, the Philippines, Russia, Saudi Arabia, South Africa, Thailand, Ukraine), the following assumptions are made: (1) There is a constant coverage ratio of pensioners to population older than 65 and a constant replacement rate; and (2) changes are driven by the employment ratio and old-age dependency ratio:
For China, a key assumption is the evolution of the funded component of the system. Sin (2005) assumes full implementation of the second pillar and finds declining spending in pensions as a share of GDP over time. In contrast, the baseline projections included in this paper are closer to those from Oksanen (2010), which project substantial increases in pension spending during 2010–30, assuming the generosity of the first pillar remains at its current level.
Population estimates, which affect the old-age dependency, eligibility, and inverse of the employment ratios in the identity, are from the United Nations (2010).
Number of Workers
The number of workers is defined as the population ages 15 and older that is economically active. For every country in the sample the economically active population is identified thus for each five-year age group (15–19, 20–24, …, 75–79, and 80+) separately for men and women for 1970–2050.
The share of the population that is economically active combines the fourth (data for 1950–2010) and sixth (data from 1990–2020) editions of the ILO’s Economically Active Population database. A consistent series for 1970–2020 is obtained by combining these two series—using the latest edition as the base and interpolating employment activity from 1990 to 1970 using the observed changes in the earlier data. Data for 2025–50 are projected using a fixed-effects regression on a five-year cohort (c) for every five-year period (t) during 1950–2020 (EAc,t = αEAc-1, t + βEAc, t-1 + βEAc, t-1 + γEAc, t-2 + γYEAR). In other words, the projections assume that the economic activity rate in year t for cohort c depends on the economic activity of the group five years younger than cohort c in 2020, and on the observed economic activity rate of cohort c in 2015, 2010, and 2005. This regression is performed for all countries in the ILO database. The result is a consistent series of economic activity for men and women by five-year age groups during 1970–2050.
Number of Pensioners
All individuals above the statutory retirement age are considered “retired” (Table A5.8). In addition, to account for early retirement, the share of the population ages 50–64 that was economically active at ages 45–49 but is no longer active is added to the “retired” pool—this calculation follows three different cohorts, 50–54, 55–59, and 60–64, separately for men and women. Finally, the total number of “retired” is multiplied by pension coverage (percent of those above the statutory age of retirement receiving a public pension) from ILO (2010) to obtain the number of pensioners. This adjustment is made to account for public pension coverage to reflect that not all retirees receive public pensions.
Compensation to GDP
Total employee compensation from GDP (the last ratio in the pension expenditure identity) comes from the UN System of National Accounts 1993, available at http://data.un.org/Data.aspx?q=compensation+of+employees&d=SNA&f=group_code%3a401%3bitem_code%3a9. The latest observed share of compensation in GDP is used, and it is assumed to remain constant throughout 1970–2050.
With all the other components computed as described above, the replacement rate in the public pension expenditure identity can be estimated as
Disability spending peaked at nearly 1.4 percent of GDP in 1993 before falling to just over 1.1 percent in 2007 (Figure A2.1). The change in disability spending between 1980 and 2007 ranged from a decline of 2 percentage points of GDP in the Netherlands to an increase of 1.1 percentage points in Hungary. In 2007, disability pension spending ranged from less than 0.1 percent of GDP in Mexico to 2.3 percent of GDP in Norway. However, the data suggest that there is some convergence in disability pension spending over time, with larger spending declines for those with higher spending (Prinz and Tompson, 2009).
Figure A2.1.Public Disability Pension Spending, 1980–2007
Sources: Organisation for Economic Co-operation and Development; and IMF staff estimates.
Note: The sample includes 27 advanced economies (Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, the United Kingdom, and the United States) and 5 emerging market economies (Chile, Hungary, Mexico, Poland, Turkey). See page xi for a list of country abbreviations.
Although reduced old-age pension benefits, or an increase in the retirement age for old-age pensions, will reduce old-age pension spending, such reforms can be expected to result in higher disability pension enrollment and spending (Jousten, Lefebvre, and Perelman, 2011; Duggan, Singleton, and Song, 2007; Li and Maestas, 2008). For example, according to Duggan, Singleton, and Song (2007), raising the full retirement age from 65 to 67 in the United States could lead to a total increase in disability pension participation by nearly a quarter, which could offset some of the budgetary gains from increasing the retirement age.
Better health and new technologies will allow many individuals to work in some capacity. The common “all-or-nothing approach” could discourage people with some ability to work from remaining in the labor market. In the United States, disability pensions decrease labor force participation by 10 percent for those with more severe impairment, and up to 60 percent for those with less severe impairment (Maestas, Mullen, and Strand, 2011). These labor supply disincentives could be addressed in a number of ways:
Those with partial disability could be allowed to work and keep part of the work income. For example, in Sweden, disability beneficiaries can earn up to about €4,000 per year before their benefit starts to reduce progressively (OECD, 2009). Another possibility is replacement of part of the cash benefits with in-kind benefits that are essential to people with disabilities, such as health care and long-term care. This would make little difference for persons with severe disability but could reduce disability applications by those in relatively good health.
In addition, people with a significant, albeit partial, capacity to work could receive unemployment benefits rather than disability pensions. The unemployment benefits system often keeps beneficiaries engaged in job-search activities, training, or other obligatory work-related measures. In the Netherlands and Australia, some people with a significant capacity to work are no longer entitled to a disability benefit, but are classified as regular unemployed workers. Broader employment policies could also prevent people with disabilities from receiving disability pensions in the first place by, for example, better management of sick leave (OECD, 2009).
Evidence suggests that program participation is more responsive to eligibility requirements and the screening process than to the health of the population. Although life expectancy and self-reported health status have improved dramatically over time, similar trends in disability program participation are not evident across countries or over time.1 However, reform experiences indicate that disability pension participation responds to changes in eligibility criteria and enforcement levels (Milligan and Wise, 2011).2 For example, the inclusion of mental health as an eligible condition has led to rapid growth in participation in many countries. There is also evidence that stricter criteria not only reduce disability program participation, but also increase employment (Staubli, 2011). Furthermore, periodic claims reviews could reduce abuse of these programs. Since 2004, the Netherlands has reassessed the entitlements of a large group of beneficiaries (those under age 50), and benefit dependence was reduced significantly (OECD, 2009).
Both means testing (which targets benefits to those who have the most need) and contribution requirements appear to lower disability pension spending (Figure A2.2). Means testing is common in Australia, Denmark, Finland, Iceland, Italy, New Zealand, Spain, and the United States. Contribution requirements are common in Austria, Belgium, Canada, the Czech Republic, France, Germany, Greece, Ireland, Japan, Korea, Luxembourg, Norway, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, and the United States.
Figure A2.2.Average Disability Pension Spending by Type of Program, 2007
Source: IMF staff estimates.
Reduced disability pensions for impaired persons, either through lower payments or reduced participation, could significantly hurt the substantial number of beneficiaries whose incomes are already well below national averages. Unless matched by off setting measures, this could have an adverse impact on poverty. As such, reforming disability pensions should proceed with caution.
This appendix uses estimates from a panel data model to quantify the impact of pensions’ generosity on poverty among the elderly.1 The model controls for aging, country-specific characteristics that could affect elderly poverty (such as differing social protection systems), and unobservable effects that may influence poverty rates in a given year. More specifically,
where subscript i indicates country and t indicates year; Share 65p is the share of the population age 65 and older; Pension is the log of the aggregate replacement rate, defined as the ratio of median individual gross pensions of those ages 65–74 relative to median individual gross earnings of those ages 50–59, excluding other social benefits; and Poverty is the log of the share of those 65 and older with a disposable income below 60 percent of the national median income (after social transfers)—Eurostat calls this the “at-risk-of-poverty” rate.2 The main data source is Eurostat, including data for 26 European countries between 2003 and 2010.
Regression analysis indicates that the risk of poverty in old age is negatively related to the replacement rate, with an elasticity of –0.42.3 In other words, a 10 percent reduction in the aggregate replacement rate would result in a 4.2 percent increase in the at-risk-of-poverty rate of the elderly. On average, the replacement ratio is projected to decrease by about 8 percentage points (equivalent to a 14 percent cut in benefits) between 2010 and 2030. The impact of these changes is moderate on average, raising elderly poverty by 1.4 percentage points. The increase in poverty (in percentage points) is highest in Bulgaria, Latvia, Lithuania, and Portugal. The estimated poverty impact is much larger by 2050. Between 2010 and 2050, the replacement ratio is projected to decrease in all countries except Belgium, Luxembourg, and the United Kingdom.4 Relative to 2010 poverty, these reductions in replacement ratios would, on average, increase elderly poverty by 2.2 percentage points, exceeding 4 percentage points in Bulgaria, Latvia, and Portugal.
In virtually all countries, the labor force participation of older men (ages 60 to 64) has declined substantially over the past five decades. In 1950 the average labor force participation rate of older men (LFPR) was about 80 percent in both advanced and emerging market economies.1 This fell sharply until 2000, to about 40 percent in the advanced economies and 50 percent in emerging markets. Since then, the rate has stabilized in emerging markets and increased in advanced economies (Figure A4.1). There is some variation across countries. Only Iceland and Japan have managed to maintain an LFPR above 70 percent over time. In Australia, Canada, Greece, Ireland, Sweden, the United Kingdom, and the United States, the LFPR has declined from above 80 percent to about 50 percent. In some European countries the drop has been even more dramatic (Austria, Finland, France, the Slovak Republic, Slovenia).
Figure A4.1.Labor Force Participation, Males 60–64
Source: International Labour Organization.
Note: See page xi for a list of country abbreviations.
The average effective retirement age declined by about five years between 1970 and 2000. This decline is largely associated with the expanded coverage of public pensions, higher replacement rates, the introduction of early retirement provisions, and falling statutory retirement ages.2
Statutory and early retirement ages introduce incentives to exit the labor force. For example, reforms that introduced early retirement (age 62 in the United States, introduced in 1961; and age 62 in Germany, introduced in 1972) shifted the peak of the “hazard rate”—the proportion of men retiring at any given age—toward the early retirement age (Figure A4.2).3
Cross-country comparisons also suggest a strong link between social security incentives to retire and the labor force participation of older workers. For example, for those ages 60–64, Duval (2003) finds a strong negative relationship between the “implicit tax” on earnings—defined as the reduction in public pension wealth from working an additional year—and the percentage change in labor force participation.4
In many advanced economies recent increases in the LFPR are associated with increased incentives to remain in the labor force. These include reductions in preretirement benefits (Denmark), tightening of unemployment benefits (New Zealand), changes in the eligibility requirements for disability programs (Sweden), actuarial reduction before the retirement age (Germany), and the decline in employer-provided defined benefit pensions (the United States).
Figure A4.2.Social Security Incentives to Retire: Implicit Taxes and Age of Retirement, Men in Germany, 1970–2010
Sources: Deutsche Rentenversicherung Bund; Duval (2003); and IMF staff calculations.
Note: See page xi for a list of country abbreviations.
Many public pension systems still provide incentives to retire early. For example, in Organisation for Economic Co-operation and Development (OECD) countries, the actuarially neutral adjustments have been estimated to be 6–9 percent for ages 60–70 (Queisser and Whitehouse, 2006). However, in the majority of the OECD economies the reduction in benefits for early retirement is less than 6 percent, which suggests that there are incentives to claim benefits early (Table A5.6). In addition, the increase in benefits as a result of working beyond the retirement age is greater than an actuarially neutral adjustment in only seven countries.
Reducing incentives to retire early can generate substantial financial gains. Gruber and Wise (2004, 2005) summarize simulations results carried out in 12 OECD countries. The potential savings (reductions in benefits minus tax revenues) are about 1 percent of GDP.
|Emerging market economies|
|Emerging market economies|
|Old-Age Dependency Ratio||Inverse of Labor Force Participation Rate||Eligibility Rate||Replacement Rate|
|Emerging market economies|
|Country||2010||2020||2030||2040||2050||2010-2030||2030-2050||NPV 2010-2030||NPV 2031-2050||NPV 2051-infinity|
|Emerging market economies|
|Author||Impact of a One-Unit Decrease in Pension|
Wealth on Private Savings
|Country of Study|
|Attanasio and Brugiavini (2003)||0.30 to 0.70||Italy|
|Attanasio and Rohwedder (2001)||–0.05 to 0.90||United Kingdom|
|Avery, Elliehausen, and Gustafson (1986)||0.11 to 0.66||United States|
|Bernheim (1987)||0.77||United States|
|Blinder, Gordon, and Wise (1980)||0.39||United States|
|Bottazzi, Jappelli and Padula (2006)||0.30 to 0.60||Italy|
|Bottazzi, Jappelli and Padula (2011)||0.80||Italy|
|Diamond and Hausman (1984)||0.25 to 0.40||United States|
|Feldstein (1974)||0.35||United States|
|Feldstein (1980)||0.54 to 0.37||12 OECD|
|Feldstein (1996)||0.60||United States|
|Gale (1998)||0.39 to 0.82||United States|
|Hubbard (1986)||0.16||United States|
|Jappelli (1995)||0.10 to 0.20||Italy|
|King and Dicks-Mireaux (1982)||0.27 to 0.51||Canada|
|Koskela and Viren (1983)||No significant effect||16 OECD|
|Kotlikoff (1979)||No significant effect||United States|
|Modigliani and Sterling (1983)||No significant effect||21 OECD|
|Munnell (1974)||0.62||United States|
|Pitelis (1985)||0||United Kingdom|
|Poterba, Venti, and Wise (1995)||No significant effect||United States|
|Shome and Saito (1980)||No significant effect||Several Asian countries|
|Venti and Wise (1990)||0.10 to 0.20||United States|
|Venti and Wise (1996)||No significant effect||United States|
|Villagómez and Hernández (2010)||0.45 to 0.60||Mexico|
|Yamada, Yamada, and Liu (1992)||0.68||Japan|
|Country||Plan Type||Early Age||Reduction (percent)||Normal Age||Increase (percent)|
|Emerging market economies|
|Latvia||NDC||60||50 until 62||62|
|DC||60||50 until 62||62|
|Saudi Arabia||DB||Any age||60M/55F||–|
|Last Data Point|
|Year||Source||2010||Country Official Data|
|Australia||2007||OECD||D||Intergenerational report 2010|
|Austria||2007||OECD||CO||DG ECFIN 2012|
|Belgium||2007||OECD||D||DG ECFIN 2012|
|Canada||2007||OECD||D||Actuarial report CPP and OAS 2009|
|Czech Republic||2007||OECD||CO||DG ECFIN 2012|
|Denmark||2007||OECD||D||DG ECFIN 2012|
|Finland||2007||OECD||D||DG ECFIN 2012|
|France||2007||OECD||CO||DG ECFIN 2012|
|Germany||2007||OECD||CO||DG ECFIN 2012|
|Greece||2007||OECD||D||DG ECFIN 2012|
|Ireland||2007||OECD||D||DG ECFIN 2012|
|Italy||2007||OECD||D||DG ECFIN 2012|
|Luxembourg||2007||OECD||D||DG ECFIN 2012|
|Netherlands||2007||OECD||D||DG ECFIN 2012|
|Norway||2007||OECD||D||DG ECFIN 2012|
|Portugal||2007||OECD||CO||DG ECFIN 2012|
|Slovak Republic||2007||OECD||CO||DG ECFIN 2012|
|Slovenia||2007||OECD||D||DG ECFIN 2012|
|Spain||2007||OECD||D||DG ECFIN 2012|
|Sweden||2007||OECD||D||DG ECFIN 2012|
|Switzerland||2007||OECD||D||Sustainability report 2008|
|United Kingdom||2007||OECD||D||DG ECFIN 2012|
|United States||2007||OECD||D||SSA 2012, OASDI Trustees report 2011|
|Emerging market economies|
|Bulgaria||2008||Eurostat||CO||DG ECFIN 2012|
|Estonia||2007||OECD||D||DG ECFIN 2012|
|Hungary||2007||OECD||CO||DG ECFIN 2012|
|Latvia||2008||Eurostat||D||DG ECFIN 2012|
|Lithuania||2008||Eurostat||CO||DG ECFIN 2012|
|Poland||2007||OECD||CO||DG ECFIN 2012|
|Romania||2008||Eurostat||CO||DG ECFIN 2012|
|South Africa||2010||National authorities||D|
|Emerging market economies|
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[Page numbers followed by f, n or t refer to figures, notes or tables, respectively.]
Accrual rates, 12
countries considered, xi, 1n. See also specific country
decomposition of pension spending growth in, 52t
distribution of types of pension plans in, 8f, 49t
effects of early retirement incentives on labor force participation in, 56t
labor force participation rates among older men in, 47, 47f
life expectancy trends in, 30, 30f
need for pension reform in, 1, 37–38t
old-age dependency ratio in, 2, 9, 9f, 11, 14
payroll tax yield in, 31–32, 32f
pensionable ages in countries of, 59t
pension reform strategies in, 2, 3–5, 12, 27, 30, 36
population aging trends in, 2
prevalence of means-tested pension programs in, 6
private pension complements to public pension plan in, 1, 7–8
projected outcomes of enacted reforms in, 14
projected public pension spending in, 2, 14, 15f, 16b, 27, 53t
public pension spending data sources, 39–40, 58t
public pension spending trends in, 2, 9, 10–11, 11f, 50t
replacement rates in, 11
risks to pension reform outcomes in, 37–38t
target areas for pension reform in, 37–38t
Age discrimination, 12
Argentina, 13. See also Emerging market economies
Australia, 3, 6, 15, 21, 23, 36, 47. See also Advanced economies
Austria, 2, 4, 14, 17, 19, 31–32, 36. See also Advanced economies
Belgium, 2, 14, 31, 36, 46. See also Advanced economies
disability pension, as enrollment factor, 43–44
extension of reference period for entitlement calculation, 12
indexed to demographic and economic variables, 4, 31, 31n
indexed to wages, 5
inflation-indexed, 17, 31, 32
poverty outcomes among elderly, 46
reform strategies to control public pension spending, 2, 3–4, 5, 12, 27, 32
for social pensions, 5, 35
Brazil, 17. See also Emerging market economies
Bulgaria, 2, 12, 13, 14. See also Emerging market economies
Canada, 15, 23, 31–32, 36, 47. See also Advanced economies
Chile, 2, 3, 6n, 13, 14, 17, 21, 26. See also Emerging market economies
China, 2, 13, 14, 26. See also Emerging market economies
Civil service pensions, 27n, 34
Colombia, 2, 14, 17, 26. See also Emerging market economies
public pension spending effects on, 26
taxation to offset pension spending, 31
generational balances and, 24b
reforms to control public pension spending, 3–4, 27
reforms to increase pension funding, 4
Cost of living adjustments, 31
in emerging countries, 33, 34f
public pension spending in emerging countries and, 11, 34, 35f
reform strategies to increase, in emerging economies, 5, 33–35, 36
Czech Republic, 2, 14, 17, 19. See also Advanced economies
Defined benefit plans
definition, 1, 6
replacement rates, 21
risk of funding shortfalls in private pension system, 3
Defined contribution plans
definition, 1, 6
risk of inadequate replacement rates in private pension system, 3
Denmark, 3, 21. See also Advanced economies
causes of increases in spending on, 6, 6n
effects of pension reform on enrollment in, 43
eligibility criteria as enrollment determinant, 43–44
eligibility determinations, 43n, 44
labor force participation and, 43
means testing, 44–45
as pathway to retirement, 6, 31
portion of public pension spending for, 1, 6
poverty outcome considerations in reform of, 46
public spending trends, 43, 44f
reforms to accompany increases in statutory retirement age, 4, 29–30
spending by program type, 45f
unemployment benefits versus, 43
outcomes of policies to encourage, 29b, 47–48, 48f
rationale for encouraging, 29b
reform strategies to control public pension spending, 5, 12
strategies to discourage, 4, 30–31, 48
Economic growth, pension reform and, 3, 22, 23–26
Egypt, 2, 14, 36. See also Emerging market economies
in emerging economies, 36
pension reform strategies in advanced economies, 36
public pension spending trends and, 2, 9
reform strategies to control public pension spending, 3, 5, 12
Emerging market economies
countries considered, xi, 1n. See also Europe, emerging market economies of;
coverage rates in, 33, 34f
decomposition of pension spending growth in, 52–53t
distribution of types of pension plans in, 6, 8f, 49–50t
effects of early retirement incentives on labor force participation in, 56–57t
labor force participation rates among older men in, 47, 47f
means-tested pension programs in, 6
need for pension reform in, 37–38t
old-age dependency ratio in, 9, 9f, 14
pensionable ages in countries of, 60t
pension reform effects on private savings in, 26
pension reform objectives in, 13
pension reform strategies for, 2, 5, 13, 33–35, 36
private pension complements to public pension plans in, 1, 6–7, 8
projected outcomes of enacted reforms in, 14
projected public pension spending in, 14, 15f, 16b, 54t
public pension spending data sources, 40, 58–59t
public pension spending trends in, 2, 9–11, 11f, 51t
risks to pension reform outcomes in, 37–38t
strategies to increase pension coverage in, 1, 5, 33–35
target areas for pension reform in, 37–38t
transition to multipillar pension structure in, 3, 20
distributional effects of pension system design, 23
intergenerational, 22, 23, 24b
as objective of pension reform, 3, 22
potential pension system effects, 23
protections for older workers to accompany increases in statutory retirement age, 29–30
Estonia, 2, 12, 14, 17, 33. See also Emerging market economies
Europe, emerging market economies of defined contribution plans in, 3
mandatory private pensions in, 12
old-age dependency ratio in, 11
pension reform in support of fiscal consolidation in, 32–33
pension reform strategies for, 2, 5
public pension spending data sources, 40
public pension spending in, 2, 10–11
recent pension policy reforms in, 33, 33t
replacement rates in, 11, 32
transition to multipillar pension structure in, 20
See also Emerging market economies;
Fertility rates, 2, 3, 9, 14, 15
Finland, 2, 4, 6, 14, 17, 31–32, 36. See also Advanced economies
intertemporal pension balance, 22–23
as objective of pension reform, 1, 3, 22, 27
pension-adjusted balance calculation, 22
pension reform in emerging Europe in support of, 32–33
Flat-rate pension payments, 1, 6
distributional effects, 23
France, 6, 12, 17, 31, 36. See also Advanced economies
Funded pension systems, defined, 7b
GDP, private pension funding shortfalls as percent of, 20–21
GDP, public pension share of
effects of reform strategies, 3–4, 27
projections, 2, 14
trends, 1–2, 9, 10–11
Germany, 12, 17, 19, 31, 31n, 36. See also Advanced economies
Global economic crisis of 2008, 2, 13, 17n, 33
Greece, 4, 17, 19–20, 31–32, 36, 47. See also Advanced economies
Hungary, 2, 12, 13, 14, 17, 26, 31, 33. See also Emerging market economies
Iceland, 18b, 47. See also Advanced economies
Implementation of reforms
in context of structural reform agenda, 1, 3
package of reforms, 12
reforms to accompany increase in retirement age, 4, 12, 29–30
transition to private and multipillar pension structure, 3, 12–13, 20, 23, 25n, 33, 34
India, 13. See also Emerging market economies
Indonesia, 18b, See also Emerging market economies
Inflation, pension indexation to, 4, 31, 32
Informal economic sector, pension coverage in emerging economies and, 5, 33–34
Insurance for defined benefit plans, 21
Intertemporal pension balance, 22–23
Ireland, 4, 6, 12, 21, 31–32, 36, 47. See also Advanced economies
Italy, 2, 14, 17, 19–20, 24b, 31, 36. See also Advanced economies
Japan, 2, 6, 12, 14, 17, 18b, 24b, 31–32, 31n, 47. See also Advanced economies
Jordan, 18b. See also Emerging market economies
Kazakhstan, 26. See also Emerging market economies
Korea, 2, 14, 31–32, 36. See also Advanced economies
Labor force participation
disability pensions and, 43
effects of early retirement disincentives, 47–48
effects of early retirement incentives, 47–48, 56–57t
in emerging economies, 10
payroll tax policy and, 24–25
pension policy effects on economic growth, 23–24
pension system linkage, 39
public pension spending trends and, 2, 9, 10
retirement age and, 23–24, 27, 28–29, 29b
trends among older men, 47, 47f
Latvia, 2, 12, 14, 17, 33. See also Emerging market economies
old-age dependency ratio and, 2, 9
projections, 3, 14, 15–17, 18b, 18f, 30f
risks to projected pension reform outcomes, 36
statutory retirement age and, 4, 5, 30, 30f, 32
Lithuania, 2, 14, 17, 32. See also Emerging market economies
Luxembourg, 2, 6, 14, 18b, 36, 46. See also Advanced economies
Mandatory private pension plans, 1, 3, 6–8, 12–13, 20, 25, 32, 33
Means-tested benefit plans, 1, 6, 44–45
Mexico, 3, 21, 18b, 26. See also Emerging market economies
Migration, 9, 17n
Multipillar (public–private) pension systems potential risks from interaction within, 3
structures in advanced and emerging economies, 1, 6–8
transition to, 3, 20
Netherlands, 2, 6, 14, 23, 36. See also Advanced economies
New Zealand, 2, 6, 14, 15, 36. See also Advanced economies
Norway, 2, 4, 6, 14, 31–32. See also Advanced economies
Notional defined contribution plans, 12, 27n, 31n
portion of public pension spending for, 6
Old-age benefits, portion of public pension spending for, 1
Old-age dependency ratio
projections in advanced economies, 14, 18b, 18f
projections in emerging economies, 18b, 18f
public pension spending and, 11f, 14
trends, 2, 9
Pay-as-you-go pension systems, 7b
Pension reform, generally
challenges for advanced and emerging market economies, 1
economic growth and, 3, 22, 23–26
effect on disability pension enrollment, 43
effect on public and private savings, 25–26, 55t
equity considerations, 3, 22, 23
fiscal consolidation as objective of, 1, 3, 22–23, 27
implications for poverty reduction among elderly, 3, 19–20
to increase coverage, 5, 33–35, 36
methodology for modeling public spending outcomes of, 39
need for, 36, 37–38t
projected outcomes of enacted reforms, 14, 17–19
recent efforts in eastern Europe, 33, 33t
risk of reversal, 3, 17, 19–20
risks to projected outcomes, 37–38t
target areas for, 36, 37–38t
trade-offs across options, 27, 28f
See also Benefit design;
Implementation of reforms;
Poland, 2, 10, 12, 14, 17, 33. See also Emerging market economies
Political risk of reform reversal, 3
determinants of, 3, 9
measurement methodology, 39
public debt reduction and, 22, 22n
public pension spending trends and, 2, 9, 10, 14
trends, 2, 3, 9
See also Old-age dependency ratio
Portugal, 6, 17, 19, 36. See also Advanced economies
Poverty reduction among elderly
disability pension reform and, 46
distributional outcomes of pension system designs, 23
pension reform considerations, 1, 3, 19–20
protections to accompany increase in statutory retirement age, 4, 29–30
replacement rate linkage, 23, 25f, 46
social pensions for, 5, 34–35
strategies to increase pension coverage in emerging economies for, 5, 13
Private pension plans
distribution of types of plans in advanced and emerging economies, 1, 6–8, 8f
effects of 2008 financial crisis on transition to, 33
effects on public pension system of problems in, 3, 20–21
effects on public savings by contribution to, 25
financing, 7b, 20f
subsidies, 4–5, 31
transition to, 3, 12–13, 20, 23, 25n, 33, 34
See also Mandatory private pension plans;
Multipillar (public–private) pension systems
Productivity, public pension spending projections and, 17
fiscal consolidation rationale, 22
pension reform considerations, 3
population aging and, 22, 22n
significance of pension spending, 1, 22
See also Fiscal consolidation
Public pension expenditure identity, 39–42
Public pension spending
composition, 1, 6, 7f
consumption outcomes, 26
by country, 50–51t
cumulative cost of projected increases in, 17f
data sources, 39–40, 58–59t
decomposition of growth in, by country, 52–53t
drivers, 2, 9, 10, 16f
effects of expanded coverage, 34, 35f
historical patterns and trends, 1–2, 6, 9–11, 10f
long-term fiscal accounting, 22–23
methodology for modeling policy reforms, 39
projected outcomes of enacted reforms, 14, 17–19
projection methodology, 14, 16b, 39–42, 58–59t
projections, 2, 3, 14–21, 15f, 28f, 32, 53–54t
reform strategies to control, 3–4, 27
significance of, in public debt reduction, 1, 22
Public pension systems
distribution of types of plans in advanced and emerging economies, 8f, 49–50t
equity effects of policy choices, 23
financing, 7b, 27n
objective, 3, 22
outcomes of private pension failures in, 3, 20–21
See also Multipillar (public–private) pension systems;
Public pension spending
in advanced economies, 11
in emerging economies, 10, 11
generational balances and, 24b
modeling methodology, 42
poverty outcomes among elderly and, 23, 25f, 46
in private defined benefit plans, 21
projections, 21, 46
public pension spending trends and, 2, 9, 10, 11f
reforms to offset coverage expansion costs, 34
retirement age and, 27–28
strategies to reduce, 4, 5, 12, 31, 32, 36
advantages of raising, as reform strategy, 4, 27–28
effect on disability pension enrollment, 43
gender differences, 5, 36
generational balances and, 24b
labor supply linkage, 23–24, 28–29, 29b
life expectancy and, 4, 5, 30, 32
objections to raising, 28–29
pensionable ages, by country, 59–60t
pension reform strategies in advanced economies, 2, 30, 36
pension reform strategies in emerging economies, 5, 32
projected increases, 12, 27
reform strategies to accompany increase in, 4, 12, 29–30
replacement rates and, 27–28
risks to projected pension reform outcomes, 36
strategies to control public pension spending, 3–4, 12, 27, 34
See also Early retirement
Revenues, pension system
collection system, 4, 31–32
funded systems, 7b
pay-as-you-go systems, 7b
strategies for increasing, 4–5, 31–32
See also Tax policy and collections
Romania, 10, 12, 13. See also Emerging market economies
Russia, 2, 14, 32. See also Emerging market economies
Saudi Arabia, 18b. See also Emerging market economies
pension reform effects, 25–26, 55t
as source of retirement income, 21n
Slovak Republic, 12, 17, 19, 31–32, 36. See also Emerging market economies
Slovenia, 2, 14, 17, 36. See also Emerging market economies
Social pensions, 5, 34–35
South Africa, 3, 21. See also Emerging market economies
Spain, 12, 17, 19, 21, 30n. See also Advanced economies
Subsidization of private pension plans, 4–5, 31
Survivor benefits, 1, 6
Sweden, 19, 31–32, 36, 43, 47. See also Advanced economies
Switzerland, 2, 3, 14, 18b, 21, 31–32, 36. See also Advanced economies
Tax policy and collections
future strategies for public debt reduction, 22
payroll tax effects on labor supply, 24–25
payroll tax yields, 31–32, 32f
strategies for increasing revenues to offset pension spending, 4, 31–32
taxation of pension benefits, 31
Turkey, 2, 10, 14, 36. See also Emerging market economies
Ukraine, 10, 17, 32. See also Emerging market economies
United Kingdom, 6, 12, 17, 18b, 18f, 19, 20–21, 23, 31–32, 36, 46, 47. See also Advanced economies
United States, 4, 12, 15, 23, 24b, 30n, 31, 36, 47. See also Advanced economies
Value-added taxes, 31n
labor force participation, public pension spending and, 2, 9
retirement age, 5, 36
The determination of disability pension eligibility is often a subjective process. Many countries rely on self-reported disability status to determine eligibility. Even for countries where more objective measures of disability status are used, implementation can become subjective in practice. In the United States, for example, to qualify for a disability pension an individual must have a medically determinable physical or mental impairment that is expected to result in death, or last for at least a year, and that prevents the person from engaging in “substantial gainful activity”—a subjective concept.
Disability pension reforms include those of Austria (1996), Belgium (1997), Canada (1995), Denmark (1984), France (2004), Germany (1984), the Netherlands (a series in the 1980s), and Sweden (1992).
Few studies quantify the impact of reducing the generosity of pension benefits on old-age poverty. Jackson, Howe, and Nakashima (2010) use household survey data to simulate the impact of changes in pension income while assuming that asset income and employment income grow at the same rate as GDP. Zaidi, Grech, and Fuchs (2006) estimate a reduced-form relationship between pension income and the elderly poverty rate and assume the relationship holds in the future—similar to the analysis presented in this appendix.
See Eurostat Glossary at http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:At-risk-of-poverty_rate.
The elasticity estimate from a model that does not control for country fixed effects is about–0.7, indicating potential bias introduced by the likely positive correlation between the generosity of pension benefits and the generosity of social protection systems across countries.
The average impact is only slightly higher for countries where the replacement ratio is projected to increase, at 2.6 percentage points.
A similar trend is evident for females in emerging markets. In advanced economies, the participation rate of older women was essentially flat until 2000 and has increased thereafter.
Other factors such as rising living standards do not seem to account for the observed increase in effective retirement ages in the OECD. These factors would imply a concurrent increase in leisure across all working ages while reductions in LFPR are concentrated around statutory retirement ages (Duval, 2003).
However, the pace of adjustment in hazard rates appears to be larger in countries with higher implicit taxes on continued work after retirement.
Taking into account the recent pension reforms, OECD (2011) recalculated accruals for future retirees and found that the average tax rate is still positive, although this is largely driven by a few countries, such as Greece and Luxembourg.