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Sheetal K. Chand and Mr. Albert Jaeger

Abstract

This paper discusses a study analyzing aging populations and public pension schemes. An aging society is characterized by a growing proportion of the retired to the active working population. The study examines the pension-related aging problem primarily from a fiscal perspective. It analyzes how prospective demographic developments that affect the proportion of the pensionable elderly affect pension outlays. It confirms that very serious fiscal stresses are in prospect for most industrial economies. Addressing such problems satisfactorily will require major actions early, given the long lead times involved in reforming a pension fund's financial position.

Mr. Benedict J. Clements, Mr. David Coady, Frank Eich, Mr. Sanjeev Gupta, Mr. Alvar Kangur, Baoping Shang, and Mauricio Soto

Abstract

Pension reform is high on the policy agenda of many advanced and emerging market economies. In advanced economies the challenge is generally to contain future increases in public pension spending as the population ages. In emerging market economies, the challenges are often different. Where pension coverage is extensive, the issues are similar to those in advanced economies. Where pension coverage is low, the key challenge will be to expand coverage in a fiscally sustainable manner. This volume examines the outlook for public pension spending over the coming decades and the options for reform in 52 advanced and emerging market economies.

Mr. Benedict J. Clements, Mr. David Coady, Frank Eich, Mr. Sanjeev Gupta, Mr. Alvar Kangur, Baoping Shang, and Mauricio Soto

Abstract

Pension reform is high on the policy agenda of many advanced and emerging market economies. In advanced economies the challenge is generally to contain future increases in public pension spending as the population ages. In emerging market economies, the challenges are often different. Where pension coverage is extensive, the issues are similar to those in advanced economies. Where pension coverage is low, the key challenge will be to expand coverage in a fiscally sustainable manner. This volume examines the outlook for public pension spending over the coming decades and the options for reform in 52 advanced and emerging market economies.

Mr. Benedict J. Clements, Mr. David Coady, Frank Eich, Mr. Sanjeev Gupta, Mr. Alvar Kangur, Baoping Shang, and Mauricio Soto

Abstract

Pension reforms should (1) contribute to fiscal consolidation efforts, (2) address equity issues, and (3) support economic growth. The objective of public pensions is to provide retirement income security within the context of a sustainable fiscal framework. The importance of providing income security, especially for low-income groups, suggests that pension reform must also be equitable. Furthermore, the design of public pensions has the potential to affect economic growth through its impact on labor markets and national saving. These issues are discussed further below and provide the guiding principles behind the pension reform options outlined in Chapter 7 for advanced, emerging European, and other emerging market economies.

Mr. Benedict J. Clements, Mr. David Coady, Frank Eich, Mr. Sanjeev Gupta, Mr. Alvar Kangur, Baoping Shang, and Mauricio Soto

Abstract

This chapter analyzes historical trends in public pension spending in advanced and emerging market economies. These trends must be observed against the backdrop of gradual population aging. During 1970–2010 the old-age dependency ratio—that is the number of people ages 65 and older divided by the number of people ages 16 to 64 (the “working age”)—increased from 17 percent to close to 25 percent in advanced economies and from 10 percent to nearly 14 percent in emerging markets (Figure 3.1). In other words, for every person 65 and over there are currently four people of working age in advanced economies and just more than six in emerging market economies. In most countries the gradual increase in part reflects increases in life expectancy but mainly the decline in fertility rates since the 1950s. As a result of the latter, the working-age population has been growing less rapidly. Migration is the other key demographic variable that can affect the old-age dependency ratio. In many countries, though, its impact on the overall population structure and hence the age distribution is not significant.

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

In recent years, the issue of pension reform has been high on the agenda of many countries. To a large extent, this reflects common concerns regarding demographic trends of declining birthrates and increasing life expectancies that have shed serious doubt on the sustainability of current pension systems. Most countries have attempted to shore up their pay-as-you-go (PAYG) systems through some combination of reduced lifetime benefits and higher social taxes.

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

The Baltic states inherited a PAYG pension system from the Soviet Union (Box 2.1). Economic developments of the early 1990s had a tremendous impact on the pension systems in ail transition economies, including the Baltic countries. Economic depression accompanied by growing unemployment (open and hidden) undercut the pension system’s financing while adding large numbers of new beneficiaries.1 At the same time, high inflation rates that were not immediately fully matched by nominal pension increases contributed to a sharp decline in the real value of pensions and flattening of benefits across different groups of beneficiaries.2

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

While the early reforms of the Baltic PAYG systems were oriented at preserving the financial solvency of these systems, demographic trends led policymakers in the Baltics, as elsewhere, to look for alternatives to their pensions systems. A PAYG system remains solvent as long as the working generation is able and willing to share sufficient income with the retired generation. However, given expected population trends, it was viewed as unrealistic to expect future working generations, dwindling in absolute numbers, to continue to support an ever larger population of retirees to the same extent as at present. To ensure sustainability via a PAYG system would require further increases in the already high payroll tax rates—which would overburden the working generation, complicate social tax collection, and have an increasingly negative impact on work incentives 21—or reductions in lifetime retirement benefits. As indicated in Table 3.1, maintaining a 40 percent replacement rate and a retirement age of 60 in the Baltics would eventually require that a payroll tax collect about 40 percent of gross wages, which would imply a tax rate well in excess of 40 percent.

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

A pension reform that introduces an FF pillar or increases the importance of an existing FF pillar will affect the macroeconomic savings-investment balance in three basic ways. First, a tax-financed pension reform strengthens savings by substituting an FF pillar based on capital accumulation for a PAYG pillar based on intergenerational redistribution. Second, a pension reform involves transition costs that need to be financed; other things equal, this reduces national savings. Third, a pension reform can affect private savings outside the pension system.

Mr. Benedict J. Clements, Mr. David Coady, Frank Eich, Mr. Sanjeev Gupta, Mr. Alvar Kangur, Baoping Shang, and Mauricio Soto

Abstract

Population aging will accelerate markedly in advanced and emerging market economies over the coming decades and will put additional pressure on age-related spending for years to come. This chapter presents public pension projections out to 2030 based on current policies. Where available, the projections presented are based on official estimates; where these are not readily available, the projections reflect the impact of changing demographics and labor force participation, and are adjusted to account for reforms that would affect eligibility ratios and replacement rates.