Vulnerability of Social

Institutions

Falilou FALL

OECD Economics Department

New Approaches to Economic Challenges

Seminar on Project C2, 18 March 2014

1

• Role and functions of social institutions

• Social institutions and the crisis

• Institutional design influences their vulnerabilities – country specificities

• The scope of the analysis: pension, health care and unemployment insurance (UI)

• Balance between sustainability and adequacy

• Outline: – Trend and long run changes: ageing and productivity

– Macro shocks and UI

– Policy recommendations

2

Introduction and outline

• Shocks – Sustainability – Reforms - Adequacy

• What are the critical drivers of vulnerabilities and the sensitivity to risks?

• How do the different shocks affect the sustainability of social institutions?

• Institutional capacity to cope with shocks and risks

• Adequacy and impact of reforms

3

The framework

Adaptive and recovery capacity

Risk prevention

Shocks

Impact on promises

and costs of meeting

them

• Ageing Figure 1: OECD old-age support ratio will decrease from 4.2 currently to 2.1 in 2050

4

Long-term risks and trends and their effects

on social institutions

0

2

4

6

8

10

12

Difference 2050-2010 2050

Source: OECD (2013), Pensions at a Glance 2013

5

Ageing and health care systems

0

2

4

6

8

10

12

14

16

Baseline Morbidity compression Morbidity expansion

Figure 2: Health status in old age affects public health care spending

Source: OECD calculations and de la Maisonneuve and Oliveira Martins (2013).

6

Ageing and pension systems

0

2

4

6

8

10

12

14

16

18

20

2010 2050

Source: OECD (2013), Pensions at a Glance 2013

Figure 3: Public pension expenditure projections

7

The impact of a longevity shock on a PAYG defined

benefit scheme

Source: OECD simulations

Figure 4: Simulation of the impact of a longevity shock on DB scheme

8

Ageing, social spending and fiscal consolidation

Figure 5: The impact of future health and pension spending on consolidation needs

Source: Cournède, B. et al. (2013), Pensions at a Glance 2013 and de la Maisonneuve and Oliveira-Martins (2013).

• Health spending, price and technology developments

9

Productivity developments and social institutions

Source: de la Maisonneuve and Oliveira Martins (2013).

Figure 6: Price and technological developments affect the public health spending-to-GDP ratio

10

Productivity changes and pension schemes

Source: OECD simulations

Figure 7: The effect of a productivity growth slowdown on a DB scheme

11

Macroeconomic shocks and unemployment

insurance

11

Figure 8: Evolution of the NAIRU during the crisis

-8

-6

-4

-2

0

2

4

Change in Nairu 2006-08

Change in Nairu 2009-12

Source: EO93 database, OECD Social Expenditure database, OECD calculations.

Figure 9: Unemployment rate and volatility

12

Source: EO93 database, OECD Social Expenditure database, OECD calculations.

Figure 10: Unemployment insurance spending elasticity to unemployment

Figure 11: Spending asymmetries over the cycle

13

-3

-2

-1

0

1

2

3

-8

-4

0

4

8

12

Source: EO93 database, OECD Social Expenditure database, OECD calculations.

– Pension schemes, ageing and risks (interest rate, asset price and longevity).

– Pension reform levers : retirement age, contribution rate and pension rate.

– Adjusting key parameters automatically to life expectancy.

– Widening the coverage of voluntary private pensions as a complement to public pensions.

Figure 12: Poverty among older people (2010, people older than 65 years )

14

0

5

10

15

20

25

30

35

40

45

50

All 65+ Whole population

Source: OECD Income Distribution and Poverty Database.

Overcoming vulnerabilities of pension systems

– Health care spending drivers : ageing, price and technology developments.

– Policy options for reducing spending: higher cost sharing and tax incentives for private health insurance curb public spending, but worsen adequacy.

– Supply side policies: regulated competition, well-designed budgetary caps, hospital payments (diagnostic related groups and health technology assessments).

– Greater efficiency and spending savings.

Figure 13: Degree of cost sharing

15

Overcoming vulnerabilities of health care

systems

0

0.5

1

1.5

2

2.5

3

3.5

NLD LUX

FRA

IRL

GBR

USA

USA

DEU CZE

DNK

CAN

NZL

JPN

NOR

AUT

SWE

ISL

AUS

BEL

FIN

TUR

ITA

ESP

PRT

POL

HUN

SVK

CHE

KOR

GRC

MEX

Source: OECD Survey on Health System Characteristics 2008-09.

– Generous benefits can lead to large spending spikes.

– Unemployment insurance adequacy in crisis times.

– Effective activation policies can increase UI efficiency.

– Contingency plans to adjust policies during crises should be in place.

Figure 14: The responsiveness of active labour market policies to unemployment

16

Overcoming vulnerabilities of unemployment

insurance (UI)

AUS

AUT

BEL

CAN

CHE

CZE

DEU

DNK

ESP

EST

FINFRA

HUN

IRL

ISR

ITAJPN

KOR

LUXMEX

NLD

NZL

POL

PRT

SVK

SVNSWE

USA

-50

0

50

100

150

200

250

300

-50 0 50 100 150 200 250 300 350 400

ALMP expenditure scaled by GDP per capita, per cent change 2007-10

Unemployment, per cent change 2007-10

45o

Source: OECD Social Expenditure Database.

THANK YOU