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European pension reforms Master PPD 13 /02 / 2009 Olivier Bontout - DREES

European pension reforms Master PPD 13 /02 / 2009 Olivier Bontout - DREES Ministry of labour, family and solidarity, Ministry of health, youth and sports, Ministry of budget and public accounts. Pension reforms. General framework A common challenge

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European pension reforms Master PPD 13 /02 / 2009 Olivier Bontout - DREES

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  1. European pension reforms Master PPD 13 /02 / 2009 Olivier Bontout - DREES Ministry of labour, family and solidarity, Ministry of health, youth and sports, Ministry of budget and public accounts

  2. Pension reforms General framework A common challenge Main developments in current reforms Recent developments : labour market and pension prospects Some outstanding issues European approach - OMC

  3. I – General framework • Broad meaning • Definitions • Organisation

  4. Broad meaning • Face major life risks • Distribution of risks • Not only poverty relief in old age but also income replacement function

  5. EU 25 Total Government expenditures (including interests)‏ 49,0 Total Social Protection 26,8 Old age and survivors benefits 12,3 Sickness, health care 7,6 Unemployment (including ALMP)‏ 1,8 Disability 2,1 Family and children 2,1 Housing, social exclusion n.e.c. 0,9 Size of government expenditures in 2003 (%GDP)‏ Source Eusrostat; New Cronos and ESSPROS

  6. Social protection expenditures in 2003 (by function)‏ Data for Cyprus are not available. Source Eusrostat; New Cronos and ESSPROS

  7. Definitions • Funded vs. unfunded (PAYG) • Reserves… • Defined benefit (DB) vs. defined contribution (DC)‏ • NDC…

  8. Organization of pension systems • Public – Social security General and mandatory • Earnings related or flat rate • Minimum income provision - within general pension schemes - separate targeted benefits • Supplementary provision • Occupational (linked to employer)‏ • Voluntary

  9. Future tax-payers Adjustments - three generations Current tax payers Current retirees

  10. Adjusments - three channels Adjusting benefits Action on tax and contributions (including collection)‏ Working longer, Increasing retirement ages

  11. II - A common pension challenge: adjustments needed Increase in life expectancy and dependency ratios Decline in effective retirement ages … reversal in recent years Contribution rates – further increases ?

  12. Life expectancy at 60 and activity rates 55-64 Source Eurostat for Life expectancy and ILO (ES and SE 1970-2000, FR 1968-2000 , IT 1971-2000, UK 1971-1991)‏

  13. 1960 1980 1990 2004 2025 2050 Ratio population 60+ /20-59 28% 33% 35% 39% 58% 80% Ratio population 65+ /20-64 15% 21% 23% 27% 39% 58% Ratio population 70+ /20-69 / / 14% 18% 25% 40% Trends in dependency ratios Note : EU25. Source : Eurostat 2005 demographic projections.

  14. Demographic trends : EU12 more affected, in particular after 2020 and 2040 Source : Eurostat 2008 demographic projections.

  15. A common challenge All systems are concerned: DB, DC, NDC, PAYG, funded, European States are not interdependent: public finance, mobility, common social rights and objectives,

  16. III - Key elements arising from current pension reforms Strengthening incentives for working longer Developing a life-cycle approach and strengthening the link between contributions and benefits while reducing access to early paths out of employment

  17. Key elements arising from current pension reforms (2)‏ Making pension systems more adaptable to structural changes in society Develop secure private pensions complementing and partially replacing public pension provision

  18. IV – Recent developments Labour market – a recent reversal Benefits – the key challenge of working longer Private pensions

  19. Employment of older workers : a huge potential of progress Recent improvements, but still huge potential Still decreasing employment rate from age 55 Most transitions from employment to pensions are not direct

  20. Recent increases of employment of older workers Source : LFS

  21. Older workers employment (55-59)‏

  22. Older workers employment (60-64)‏

  23. Part time employment (55-64)‏

  24. Part time employment (55-64)‏

  25. Decreasing employment rate from age 55

  26. The key role of reducing early exits from the labour market

  27. The key role of promoting longer working lives Employment rates of older workers : some signs of divergence Between States : divergence Between genders : slow convergence Between qualifications : divergence

  28. Non convergence between MSs? Average standard deviation of employment rates 55-64 and 25-54 Source : LFS – Note : Total for all Member States available , EU* for a group of Member States where are available all the period long (BE, DK, DE, IE, EL, FR, IT, LU, NL, UK)‏ -30- 30 Commission européenne

  29. Slow convergence between Genders ? Employment rates by gender for 55-64 in EU -31- 31 Commission européenne

  30. Divergence between skill levels? Employment rate of men 55-64 in EU25 -32- 32 Commission européenne

  31. Projected long term trends • Adequacy : theoretical replacement rates • Sustainability : expenditures projections -33- 33 Commission européenne

  32. The key role of promoting longer working lives Longer working lives strongly impacts on : adequacy – on individual replacement rates compensation for declines induced by ongoing reforms (ISG-OECD theoretical replacement rates)‏ sustainability – on future expenditures compensation for demographic pressure and decline of average benefit ratio (AWG projections)‏

  33. Trend of replacement rates : effect of enacted reforms at a given retirement age 2005-2050 A trend toward a decline in most statutory schemes Source : Stylised illustration from ISG results on gross replacement rates

  34. How to compensate for this decline ? Working longer and private pensions Source : Stylised illustration from ISG results on gross replacement rates

  35. Trends of future pension expenditures Source : AWG projections

  36. Decomposition of trends of public pension expenditures (2004-2050)‏ Source : AWG projections

  37. Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Private pensions vs state pensions: voluntary or mandatory DB or DC schemes, individual or occupational offered by companies exclusively or with some role played by the state. The risk is shifted from the state to individuals/employers/private companies. Development of private pensions

  38. Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 An expected increase of the contribution of privately managed schemes to the income of retired people But public PAYG pension schemes are expected to remain the principal source of income of pensioners in all but a few Member States The role of private and supplementary pensions in the EU

  39. Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Coverage (% of the workforce)‏ Low (<10%)‏ Medium (between 10% and 50%)‏ High (between 50% and 90%)‏ Very high (> 90%)‏ Average contribution to the income of retired people Low or negligible (<10%)‏ EL FR IT CZ ES LV LT LU AT SK BE EE HU PL SI Medium (between 10% and 25%)‏ FI PT DE IE SE High (> 25%)‏ UK DK NL Very high (More or around 50%)‏ Current situation

  40. Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Current situation and expected evolution in selected countries

  41. V - Some key issues • Concerns about equity and poverty • Compulsion vs. incentives : private pensions and working longer • How to fully restore social and financial sustainability ? -43- 43 Commission européenne

  42. Key issues (1)‏ • Concerns about equity and poverty • Risks related to inadequate pension provision • A revival of minimum income provision -44- 44 Commission européenne

  43. Projected evolutions : adequacy and sustainability Source : Stylised illustration from ISG and AWG results (public pension schemes include the funded tier of statutory schemes)

  44. How to strengthen the role of minimum pensions and solidarity in pension systems ? • Poverty risk among elderly remains generally higher than overall population • Links between level of benefits, degree of means-test, incentives and indexation rules • A need for appropriate monitoring tools -46- 46 Commission européenne

  45. Poverty risk among elderly Source Eurostat, income data -47- 47 Commission européenne

  46. Theoretical replacement rates : effect of indexation 10 years after retirement (2005-2015) Source : ISG results on gross replacement rates

  47. Key issues (2)‏ • Compulsion vs. incentives : private pensions and working longer • Working longer : choice, incentives for earlier / deferred retirement, partial retirement • Private pensions : incentives and coverage -49- 49 Commission européenne

  48. Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008 Coverage and solidarity • Fiscal incentives : efficiency, costs and equity issues • Risk sharing Transparency and portability Information and financial literature • Admin charges • Security Private pensions – key issues

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