Global Trends in Public Pension

Spending and Outlook

Benedict Clements

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.

Plan of Presentation

2

I. Trends and drivers of public pension spending in

advanced and emerging economies

II. Fiscal context and projected spending increases

III. Risks to projections

IV. Conclusions

I. Trends and drivers of

public pension spending

3

4

After rapid increases over 1970-1990, reforms have

slowed the growth of public pension spending

advanced economies

0

2

4

6

8

10

12

14

16

18

1970 1980 1990 2000 2010

P e

n s io

n S

p e n

d in

g , p

e rc

e n t o

f G

D P

Lowest Average Highest

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Note: The average includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,

Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, the United Kingdom, and the United States. The lowest/highest refers to the single country with

the lowest/highest spending.

0.9

0.3

2.0

-0.1

1.5

-0.6

1.1

-0.5

-3

-2

-1

0

1

2

3 A

g in

g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

A g

in g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

1970-1990 (Advanced)

1990-2010 (Advanced)

C o

n tr

ib u ti o

n t o

S p

e n

d in

g G

ro w

th

Evolution of Public Pension Expenditures in Advanced Economies, 1970–2010

(Percent of GDP)

5

Higher replacement rates and aging have

driven spending in advanced economies

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1970 1980 1990 2000 2010

P e n s io

n S

p e n d in

g , p e rc

e n t o f G

D P

Australia Japan Korea New Zealand

6

Trends vary across countries

Sources: OECD, ILO, UN, and IMF staff estimates.

0.7

-0.4

0.5

-0.2

4.8

-2.3

2.7

-0.4

-3

-1

1

3

5 A

g in

g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

A g

in g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

1990-2010 (Australia)

1990-2010 (Japan)

C o

n tr

ib u ti o

n t o

S p

e n

d in

g G

ro w

th

Evolution of Public Pension Expenditures in Advanced Asia and Pacific, 1990–2010

(Percent of GDP)

7

Higher replacement rates and aging have

driven spending in advanced economies

Sources: OECD, ILO, UN, and IMF staff estimates.

0.9

-0.1

0.1

-0.1

1.1

-3.8

0.9

-0.8

-4

-2

0

2 A

g in

g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

A g

in g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

1990-2010 (Korea)

1990-2010 (New Zealand)

C o

n tr

ib u ti o

n t o

S p

e n

d in

g G

ro w

th

Evolution of Public Pension Expenditures in Advanced Asia and Pacific, 1990–2010

(Percent of GDP)

8

Higher replacement rates and aging have

driven spending in advanced economies

Sources: OECD, ILO, UN, and IMF staff estimates.

0

2

4

6

8

10

12

1990 2000 2010

P e

n s io

n S

p e n

d in

g , p

e rc

e n t o

f G

D P

Other Emerging

Emerging Europe

Emerging Asia

9

Large increases in pension spending in emerging

economies, but from low level in Asia

Evolution of Public Pension Expenditures in Emerging Economies, 1990–2010

(Percent of GDP)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Note: Emerging Europe includes Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia,

Turkey, and Ukraine. Emerging Asia includes China, India, Indonesia, Malaysia, Pakistan, Philippines, and

Thailand. Other emerging includes Argentina, Brazil, Chile, Colombia, Egypt, Jordan, Mexico, Saudi Arabia,

and South Africa.

1.8

-1.5

2.1

0.7 1.0

-0.4

0.7

-0.3

0.2 0.0

0.9

0.0

-3

-2

-1

0

1

2

3 A

g in

g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

A g

in g

E lig

ib ili

ty

R e p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o

n

A g

in g

E lig

ib ili

ty

R e

p la

c e m

e n t

ra te

L a b

o r

fo rc

e

p a rt

ic ip

a ti o n

1990-2010 (Emerging Europe)

1990-2010 (Other Emerging)

1990-2010 (Emerging Asia)

C o

n tr

ib u

ti o

n t o

S p

e n

d in

g G

ro w

th

10

Higher replacement rates and aging have

driven spending in emerging economies

Evolution of Public Pension Expenditures in Emerging Economies, 1990–2010

(Percent of GDP)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

ISL IRL

KOR

NZL SVK USA

AUS

AUT

BEL

CAN

CZE DNK

FIN

FRA GRC

LUX NLD NOR

PRT

SVN ESP SWE

CHE

GBR

GER

ITA

JPN

0

4

8

12

16

20

0 10 20 30 40 50 60 70

S p e n d in

g (

p e rc

e n t

o f

G D

P )

Replacement Rate (percent of average wage)

Advanced

IND IDN

MYS

PAK PHL SAU ZAF

TUR

EGY JOR

ARG

BRA

CHN

CHL

MEX

POL

RUS

THA

BGR

EST HUN

LVA

LTU ROM

UKR

0

4

8

12

16

20

0 10 20 30 40 50 60 70

S p e n d in

g (

p e rc

e n t

o f

G D

P )

Replacement Rate (percent of average wage)

Emerging

0 2 4 6 8 10 12 14 16

-80 120 Old-age dependency ratio=0-10 Old-age dependency ratio=10-20

Old-age dependency ratio=20-30 Old-age dependency ratio=30-40

Pension Spending, Replacement Rates, and Aging, 2010

11

Variation in spending reflects differences in

aging, system generosity, and coverage rates

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

II. Fiscal context and projected spending

increases

12

0

20

40

60