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Equity Analysis for Pensions (Social Insurance)

Equity Analysis for Pensions (Social Insurance). Anita M. Schwarz ECSHD May 2006. Objectives of a Pension System. Reduce poverty among the elderly Smooth consumption between working years and retirement years

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Equity Analysis for Pensions (Social Insurance)

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  1. Equity Analysis for Pensions (Social Insurance) Anita M. Schwarz ECSHD May 2006

  2. Objectives of a Pension System • Reduce poverty among the elderly • Smooth consumption between working years and retirement years • Implication: those who earn and consume more in working years will consume and earn more in retirement years • Very different from other public expenditure programs which ideally would be designed to allocate equal or greater share of expenditures to the poor

  3. Example from OECD countries, Pensions at a Glance

  4. Pensions at a Glance

  5. Pensions Based on Contributions • Coverage limited to those who pay; benefits based on level and duration of contributions • Less than 50% of the labor force is paying contributions – likelihood of paying goes up with income • Unsurprisingly, expenditures go to higher income groups

  6. Important Redistributions Nonetheless • Redistribution from those outside the system to those within when there are fiscal deficits • Redistribution across generations – younger cohorts pay more with aging of the population • Redistribution within covered cohort • Progressive benefit formula • Minimum pension

  7. Fiscal Sustainability

  8. Fiscal Sustainability • Someone has to pay the future pensioners • Either paid from outside the system • Partial default due to rules change • Redistribution from outside the system to within • Intergenerational equity

  9. Equity within a Cohort

  10. Sometimes Need to Look Beyond Pension System for Intracohort Equity • Sometimes means-tested pension benefits available in addition to contributory • Sometimes basic benefits available to all • Sometime pensioners eligible for same social assistance as other age groups

  11. Tools • PROST model: • Fiscal analysis • SR and LR sustainability • Implicit pension debt • Individual level social analysis • Vary starting age, retirement age, starting wage, wage growth, work history, and mortality experience • Pensions as percentage of economy wide wage • Pensions as percentage of own final salary • Internal rate of return provided by pension system

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