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The author would like to thank Dimitri Demekas, Peter Part (Ministry of Finance), and Hans Stefanits (Ministry of Social Security and Generations) for very helpful comments.
The replacement rate is the ratio of pensioner’s initial benefit to his/her last wage.
Civil servant pensioners are, however, subject to a so-called “pension security contribution” levied on gross pension benefits and amounting to 2.3 percent of benefits. This contribution is to be phased out, and replaced by a benefit assessment period of 15-18 years.
See Ministry of Finance (2000).
Specifically, the authorities’ assumption is that total participation rates of elderly aged 55-59, 60-64, and 65 and above will increase by 54, 380, and 295 percent from 2000-2050, respectively (with the rates for women in these age groups increasing, 128, 800, and 400 percent, respectively). Employment is expected to fall on average 0.1 percent annually over the period due to the shrinkage in the effective labor supply despite the higher participation rates, while the unemployment rate will drop to around 4 percent. Annual real GDP growth equals IMF WEO projections for 2000-2007, and is assumed on average to fall to about 1.7 percent thereafter. This implies average productivity growth of around 1.8 percent, which is in line with the experience of recent years. Average pension benefits are set to increase annually by 1.4 percent (real), in line with average net wages.
Thus, the participation rates of elderly are assumed not to increase much beyond the direct effect from the already decided increase in the minimum ages for early and old-age retirement. Employment is projected on average to fall by 0.2 percent annually, and the consequent lower level of employment leads to reduced annual real GDP growth compared to scenarios 1 and 2 which is assumed to average 1.5 percent during 2008-2050, 0.2 percent lower than in scenarios 1 and 2.
In this example, it is assumed that the indexation of pensions moves towards direct price indexation. Due to the large difference between the average pension of old and new pensioners and the associated element of drift in average pensions over time, the indexation of individual pensions is currently assumed to be in line with inflation. As the difference between old and new pensions diminishes over time, individual pensions can be indexed by a factor higher than inflation, while still matching total average pension growth to that of average net wages. A move towards price indexation of individual pensions will therefore result in marginal but increasing savings on average pensions. With this in mind, it is assumed in this scenario that average pension indexation relative to the preceding scenarios is reduced by 0.2 percentage points from 2010-2024 and by an additional 0.2 percentage points from 2025-2050.