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Comparing pension systems. Methodology Selected results for OECD countries, Eastern Europe/Central Asia, Latin America/Caribbean Edward Whitehouse. Comparing pension systems. Fiscal approach: projections of pension expenditure Institutional approach: describing pension systems’ parameters

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comparing pension systems

Comparing pension systems

Methodology

Selected results for OECD countries, Eastern Europe/Central Asia, Latin America/Caribbean

Edward Whitehouse

comparing pension systems2
Comparing pension systems
  • Fiscal approach:
    • projections of pension expenditure
  • Institutional approach:
    • describing pension systems’ parameters
  • Income-distribution analysis:
    • comparing incomes of older people and the population as a whole
a microeconomic approach
A microeconomic approach
  • Model of pension entitlements at the individual level
  • Goal: quantitative indicators of pension-system parameters for cross-country monitoring of retirement-income systems
  • Consistent across a broad range of countries
  • Covers all mandatory pensions
    • resource-tested schemes (including social assistance)
    • basic schemes
    • minimum pensions
    • earnings-related public and mandatory private schemes
    • mandatory defined-contribution plans
  • Includes effect of personal income tax and social security contributions
a microeconomic approach4
A microeconomic approach
  • Full-career workers
    • contribute every year from age 20 (or standard entry age) to normal pension eligibility age
  • Across the earnings distribution: (0.3 to 5 times average pay)
  • All currently legislated reforms fully in place
    • ‘steady-state’ assumption
    • new labour-market entrants
  • Macroeconomic assumptions
    • earnings growth (individual and economy): 2%
    • real rate of return (on funded pensions): 3.5%
    • discount rate (for actuarial calculations): 2%
    • mortality rates: latest data for individual countries and regional averages
results
Results
  • Relative pension value
    • pension entitlement as a proportion of economy-wide average earnings
  • Indicators of
    • redistributive power of pension systems
    • overall generosity of schemes: average pension value
    • potential resource transfer to pensioners: average pension wealth
pension values oecd9
Pension values: OECD

2

1.75

1.5

1.25

1

Gross pension value

Belgium

.75

Switzerland

.5

Norway

.25

0

0

.5

1

1.5

2

2.5

Earnings

pension values eca
Pension values: ECA

2

1.75

1.5

1.25

1

Gross pension value

Lithuania

Bulgaria

.75

Croatia

.5

.25

0

0

.5

1

1.5

2

2.5

Earnings

pension values lac
Pension values: LAC

2

Costa Rica

1.75

1.5

1.25

1

Gross pension value

.75

Dominican R

.5

.25

0

0

.5

1

1.5

2

2.5

Earnings

pension values lac16
Pension values: LAC

2

Costa Rica

1.75

1.5

Colombia

1.25

Peru

El Salvador

1

Gross pension value

Chile

.75

Mexico

Dominican R

.5

.25

0

0

.5

1

1.5

2

2.5

Earnings

pension values lac17
Pension values: LAC

2

Costa Rica

1.75

1.5

Colombia

1.25

Peru

El Salvador

1

Gross pension value

Chile

Argentina

.75

Mexico

Dominican R

.5

.25

0

0

.5

1

1.5

2

2.5

Earnings

pension values lac18
Pension values: LAC

2

Costa Rica

1.75

Uruguay

1.5

Colombia

1.25

Peru

El Salvador

1

Gross pension value

Chile

Argentina

.75

Mexico

Dominican R

.5

.25

0

0

.5

1

1.5

2

2.5

Earnings

redistributive power
Redistributive power
  • All pension systems redistribute income in many complex ways both between and within generations
  • Focus on one aspect: pension benefits of workers at different earnings levels
  • An ‘index of redistributive power’ of pension systems that
    • is zero if rich and poor workers get the same replacement rate (e.g., most funded plans, some public, defined-benefit schemes)
    • is one if rich and poor workers get the same pension amount(e.g., a universal, flat-rate ‘citizens pension’)
role of the tax system
Role of the tax system
  • Personal income tax systems are progressive
    • so average effective tax rates are lower for people when they are retired than when they were working (if replacement rates are less than 100 per cent)
  • Most countries have concessions for older people in their personal income taxes
    • favourable treatment of pensioners (e.g., extra allowances)
    • favourable treatment of pension income
  • Pensioners usually not liable for social security contributions (or pay at a much reduced rate)
  • Therefore, net replacement rates are higher than gross
    • the personal tax system plays an important role in old-age support
system generosity
System generosity
  • Calculate average pension value relative to economy-wide average earnings
  • Use same synthetic earnings distribution for all countries
system generosity27
System generosity
  • Calculate average pension value relative to economy-wide average earnings
  • Use same synthetic earnings distribution for all countries
potential resource transfer
Potential resource transfer
  • Convert weighted average of relative pension value into pension wealth
  • Relationship between pension value at retirement and pension wealth depends on:
    • indexation of pensions in payment
    • pension eligibility age
    • country-specific mortality
calculating pension wealth
Calculating pension wealth
  • Pension eligibility age
calculating pension wealth31
Calculating pension wealth
  • Country-specific mortality
    • e.g., life expectancy of Hungarian men is six years below OECD average
    • this reduces value of pension wealth by 19 per cent
    • in Australia, France, Japan, New Zealand and Switzerland, life expectancy is two years above OECD average
    • this increases value of pension wealth by 7-8 per cent
structure of pension systems role of basic schemes
Structure of pension systems: role of basic schemes

New Zealand

Ireland

Argentina

United Kingdom

Netherlands

Japan

Norway

Canada

Lithuania

Czech Republic

Estonia

0

25

50

75

100

Per cent of weighted average of total pension wealth by source

Basic

Means-tested

DB

DC

structure of pension systems role of targeted schemes
Structure of pension systems: role of targeted schemes

Dominican R

Canada

Australia

Iceland

Colombia

0

25

50

75

100

Per cent of weighted average of total pension wealth by source

structure of pension systems role of dc schemes
Structure of pension systems: role of DC schemes

Peru

Mexico

Chile

El Salvador

Colombia

Dominican R

Argentina

Uruguay

Costa Rica

0

25

50

75

100

Per cent of weighted average of total pension wealth from DC scheme

structure of pension systems role of dc schemes35
Structure of pension systems: role of DC schemes

Peru

Kazakhstan

Mexico

Chile

El Salvador

Colombia

Australia

Croatia

Dominican R

Latvia

Poland

Macedonia

Estonia

Lithuania

Argentina

Hungary

Uruguay

Costa Rica

Bulgaria

Sweden

0

25

50

75

100

Per cent of weighted average of total pension wealth from DC scheme

conclusions
Conclusions
  • Microeconomic modelling of individual pension entitlements is a useful tool
    • consistent approach across countries with very different retirement-income systems
    • forward-looking
    • comprehensive: covering all mandatory sources of retirement income
    • incorporates effect of tax system
    • can isolate the impact of pension policy choices from the effects of earnings distribution, macroeconomic performance and demographics on the retirement-income system
future
Future
  • Gender
  • Disability and survivors’ benefits
  • Pension entitlements and age of retirement
  • Sensitivity analysis
  • Partial careers
  • Special schemes (e.g., public-sector workers)
  • Voluntary schemes (e.g., occupational plans)
  • Incorporate financing of benefits
  • Extend to other regions
  • Regular updates