Chapter

Recent Pension Reform Initiatives

Author(s):
Benedict Clements, David Coady, Frank Eich, Sanjeev Gupta, Alvar Kangur, Baoping Shang, and Mauricio Soto
Published Date:
January 2013
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Many countries have initiated significant pension reform over the past decade. In advanced economies these reforms have been mainly of a parametric nature, involving future increases in the legal retirement age, reduced eligibility, or adjustments to the benefit formula. Elsewhere (including in emerging Europe) they have often been systemic, involving a shift from unfunded public pensions to funded private pensions. In emerging market economies outside Europe, reforms have often aimed to make pensions more generous and to increase coverage.

In Advanced Economies Reform Was Mostly Parametric

Faced with the financial challenges arising from an aging population over the coming decades, many advanced economies have implemented pension reform over the past decade, with the aim of slowing future public pension spending growth.

To do so, several advanced economies enacted reforms that reduce future replacement rates. Reform measures include parametric changes such as reductions in accrual rates (Greece, Korea), extension of the reference period for pension entitlement calculation (Finland, France, Greece, Portugal, Spain), and built-in sustainability factors (Germany).

Reforms have also tightened future eligibility rules, mainly through increases in the statutory age of retirement. Over coming decades, the retirement age will increase gradually to 65 in Japan; 67 in Germany, Italy, Spain, and the United States; and 68 in Ireland and the United Kingdom. A number of countries have linked future retirement ages to changes in longevity (Denmark, Italy, Spain). In France pension reform raised the retirement age by two years over 2011–18.

Other reforms have enhanced incentives for older workers to remain in the labor force. These include tighter eligibility for early pensions (Greece abolished retirement before age 65 for those with fewer than 40 years of contributions or younger than age 60) and financially more attractive later retirement as a result of actuarially fair pension payouts. Moreover, most advanced economies have introduced anti-age-discrimination legislation (Australia, the European Union, New Zealand, the United States), which could make it easier for older workers to remain in the labor force.

Some systemic changes have also been introduced, however—for example, reforms that imply automatic changes in the pension formula, such as through notional returns (Austria, Italy, Sweden).

In most instances, policies were not implemented in isolation but as part of wider reform packages. In the United Kingdom, for example, changes to the indexation rule of the basic element of the public pension were announced at the same time as the gradual increase in the retirement age over coming decades and new work-based voluntary private pension savings products to boost future retirement income. Similarly, in Germany the announced increase in the retirement age was part of a wider reform package involving the introduction of the sustainability factor and promotion of voluntary private pension savings.

The Crisis Slowed the Transition to Funded Pensions in Emerging Europe

Following the earlier examples of Chile, Colombia, and Mexico, numerous economies in emerging Europe established mandatory private pensions in the 1990s and 2000s. Starting with Hungary (1998) and Poland (1999), mandatory private pensions were subsequently introduced in Bulgaria, Estonia, Latvia, Romania, and the Slovak Republic—often in the context of a more comprehensive reform package. Poland, for example, introduced mandatory private pensions while converting its government system to a notional defined contribution plan. The transition to funded private pensions varied across countries in terms of coverage (the cohorts for which the private plans became mandatory) and speed of transition (the share of contributions channeled from the government plan to the private funds).

In response to the recent financial and economic crisis, a number of emerging European economies reduced or even suspended contributions to the private plan, which slowed the transition. Instead, contributions were diverted back into the public plan (Latvia, Poland). Several countries implemented additional policies to reduce the transition costs—for example, by making membership voluntary rather than mandatory (the Slovak Republic). By making membership voluntary and offering strong financial incentives to return to the public plan (including loss of all public entitlements for those who remained in the private plan), Hungary arguably was out front in early 2011 in reversing previous pension reforms.

Reforms have not been limited only to the mandatory private pension element. Romania, for example, in the recent past reduced public pension payments on a temporary basis, changed indexation rules, and eliminated privileges, such as military pensions, for some groups. In January 2012 Bulgaria started the process of increasing the retirement age to 63 for women and 65 for men by 2017 and extending the number of contribution years required to receive a pension.

Other Emerging Market Economies

In emerging market economies outside Europe the past few years’ pension reforms have had numerous objectives. In some countries reforms have aimed to make public pensions more generous (Argentina, Brazil); in others the focus has been on extending coverage. China, for example, adopted a universal old-age security system in 2008 for all Beijing residents 60 and over with the aim of bridging the gap between private retired workers and those retired from government service. India opened up its defined-contribution-based New Pension System, initially established for public service workers, to all private sector workers in 2009 on a voluntary basis.

In countries with established mandatory private pensions, reform has taken different routes. In Chile, for example, new policies have aimed at regulating private investment funds. Moreover, noncontributory pensions to alleviate pensioner poverty were introduced in 2008. By contrast, in Argentina mandatory private pension plans were abolished and absorbed into the existing public plan in 2008.

To make public pensions more sustainable, a number of emerging market economies announced increases in the legal retirement age, while others reduced or eliminated special pension arrangements for particular groups, such as public service workers (Jordan).

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