Post on 08-Aug-2020
Public Pension Systems
in Advanced Asia Pacific
Challenges and Reform Options
Sanjeev Gupta
Fiscal Affairs Department
International Monetary Fund January 2013
This presentation represents the views of the author and should not be attributed to the IMF, its Executive Board, or its management.
2
Plan of Presentation
I. Pension Challenges
II. Reform Options
III. Risks to Reform Options
IV. Conclusions
0
25
50
75
100
0
10
20
30
40
1990 2000 2010 2020 2030 2040 2050
Note: Japan right hand axis
3
I. Pension Challenges
Working-age population
0
75
150
225
300
0
15
30
45
60
1990 2000 2010 2020 2030 2040 2050
Note: United States right hand axis
Korea
Japan
Australia
New Zealand
Singapore
Germany
United States
Canada
Italy
France
United Kingdom
Population aged 15-64
(in millions)
Source: UN.
4
I. Pension Challenges
Old-age dependency ratio
0
10
20
30
40
50
60
70
80
1990 2000 2010 2020 2030 2040 2050
0
10
20
30
40
50
60
70
1990 2000 2010 2020 2030 2040 2050
Japan
Korea
New Zealand
Australia
Singapore
Italy
Germany
France
United States
Canada
United Kingdom
Population 65 and older as a share of population aged 15-64
Source: UN.
5
I. Pension Challenges
Life expectancy trends
Life expectancy trends, gender and socio-economic
status
Life expectancy higher for females than males
Widening gap in life expectancy between lowest and
highest socioeconomic groups
20
25
30
35
2010 2020 2030 2040 2050
Australia female Australia male
20
25
30
35
2010 2020 2030 2040 2050
Japan female Japan male
Source: UN.
6
I. Pension Challenges
Increases in Public Pension Spending
0
2
4
6
8
10
12
14
2010 2020 2030 2040 2050
0
2
4
6
8
10
12
14
16
18
2010 2020 2030 2040 2050
Korea
Australia
New Zealand
Japan
Canada
United Kingdom
Italy
Germany
France
United States
Pension spending, 2010-50
(in percent of GDP)
Sources: OECD, EC, ILO, and IMF staff estimates.
Assets in pension funds, 2009
(in percent of GDP)
7
I. Pension Challenges
Different Approaches
0
10
20
30
40
50
60
70
80
90
Australia Japan Korea New Zealand
Canada France Germany Italy United Kingdom
United States
Source: OECD.
8
I. Pension Challenges
Gender and Inter-/Intra Generational Equity
Fairness of the public pension system across
Genders within a generation. What is effect of labor
market (non-) participation on accrual of entitlements?
For example, do females accrue entitlements while
providing care at home, e.g. for their children or elderly
relatives? Singles versus married couples?
Income groups within a generation
Public and private sectors within a generation. Public
Service Pensions can be substantially more generous
than state pensions
Generations. Does public pension system favor particular
generations financially in terms of benefits paid relative to
contributions made?
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II. Reform Options
Raise Retirement Age
Reduce Replacement Rates
Increase Payroll Contributions or other Revenue
In practice use a combination of the above
10
II. Reform Options
Raise Retirement Age
Measures
Increase Statutory Retirement Age with rising life expectancy
Reduce Early Retirement Incentives with the aim to raise
Effective Retirement Age
Tighten Eligibility, e.g. raise minimum contribution years
Attractive Option
No Need to Reduce Benefit Generosity
Short- and Long-Term Positive Effect on Output
Equity Issues
Same Retirement Age for all Socio-Economic Groups could
Raise Equity Issues. Increase Contribution Years instead?
Protect those who cannot work longer
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II. Reform Options
Raise Retirement Age
Sources: OECD, SSA.
Statutory retirement ages and life expectancy
2010 2030 2050
Projected increase in
life expectancy at 65
during 2010 and 2050
2010 2030 2050
Projected increase in
life expectancy at 65
during 2010 and 2050
Australia 65 66 67 3.4 62 66 67 3.3
Japan 64 65 65 3.2 62 65 65 3.7
Korea 60 62 65 3.2 60 62 65 3.4
New Zealand 65 65 65 3.4 65 65 65 3.4
Canada 65 65 65 2.8 65 65 65 3.2
France 60.5 62 62 3.1 60.5 62 62 3.0
Germany 65 65 65 3.6 65 65 65 3.4
Italy 59 66 68 3.0 59 66 68 3.4
United Kingdom 65 66 68 3.1 60 66 68 3.5
United States 66 67 67 3.0 66 67 67 3.4
Male Female
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II. Reform Options
Reduce Replacement Rates
Measures
Indexation to inflation rather than earnings
Move from final salary to career average to calculate pension
entitlement
Macroeconomic Indexation (Japan) or sustainability factor
(Germany, Sweden), which change benefits according to ratio
of beneficiaries and contributors
Equity Issues
Complementary Reforms to Private Pensions to Ensure
Adequacy
Need to Prevent Pension Poverty
0
10
20
30
40
50
60
Australia Japan Korea New Zealand
Canada France Germany Italy United Kingdom
United States
RR in 2010 RR to stabilize spending in 2050 RR projected 2050
13
II. Reform Options
Reduce Replacement Rates
Source: IMF staff estimates.
14
II. Reform Options
Increase Payroll Contributions and Taxes
0
5
10
15
20
25
30
35
40
45
50
Japan Korea Canada France Germany Italy United Kingdom
United States
2010 Payroll tax rate Required 2050 Payroll tax rate
Sources: OECD, IMF staff estimates.
15
II. Reform Options
Combination of Measures
0
2
4
6
8
10
12
14
16
0 0.5 1 1.5 2 2.5 3
Re
du
ctio
n in
be
ne
fits
(in
pe
rce
nt)
Increase in retirement age (in years)
3.4
2.5
1.7
0.8
0.0
Increase in payroll taxes(in percentage points)
Sources: OECD, EC, ILO, UN, and IMF staff estimates.
16
III. Risks to Reform Options
Reforms insufficient
For example, aging more pronounced than predicted
Would require further reforms
Pension strategy does not deliver desired outcomes
Shift to private pensions leaves government exposed to
contingent liabilities
17
III. Risks to Reform Options
Lack of Implementation
Governments shy away from implementing unpopular
policies or introduce new policies to offset impact of original
policy, thus negating previous initiatives
Examples: Japan’s Macroeconomic Indexing not fully
implemented or Germany’s decision to modify indexation
rules to prevent pensions from falling in nominal terms
during economic crisis
Reform Reversal
Authorities could undo legislation enacted by previous
governments and change pension strategy, e.g. closure of
funded pensions in central and emerging Europe
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IV. Conclusions
Achieving sustainable public finances major
challenge given pressure of demographic change on
public pension and healthcare spending
Regardless of current arrangements (e.g. funded,
unfunded, role of private pensions), no country
immune from challenges
Past reforms welcome but lack of implementation or
policy reversals pose genuine risks
Future reforms need to factor in equity issues
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Thank you!