Contributions‐financed cash benefits: Selected examples of tiered pension systems

This article addresses the link between pensions and occupational earnings using the example of social security contributions in selected OECD countries. The rules of the pension schemes studied point towards a very strong link between occupational earnings and pension level. However, certain pension calculation methods, through pension calculation parameters or through the existence of tools to compensate for certain career discontinuities, may distort this link in the majority of the countries studied. Therefore, the examination of pension calculation parameters and of solidarity measures attached to retirement is necessary to provide a more finely‐tuned evaluation of the link between occupational earnings and pension level. Ultimately, comparison of pension systems across countries remains challenging given their specificities.     

The interaction of pillars in multi‐pillar pension systems: A comparison of Canada,Denmark, Netherlands and Sweden

Canada, Denmark, the Netherlands and Sweden have advanced multi‐pillar pension systems. Using micro‐simulations, this article presents a close examination of the interaction of pillars in these countries. The relative importance and the role of the different pension pillars vary from country to country, and according to age, income, gender and socio‐economic dimensions as well as between generations. A further area of investigation is the mitigation capacity of the four pension systems. On the one hand, adverse labour careers lead to lower life‐time earnings and lower private pension accruals. On the other hand, these effects are mitigated through the design of pillars and their interaction. Mitigation is important to income security and stability in retirement and to post‐retirement income distribution. However, mitigation mechanisms come at the cost of incentives. Moreover, in many countries, the generosity of public benefits is set to decrease – increasing the importance of private pensions. This will shift risk and uncertainty from employers and pension institutions to individuals. Thus, risks and uncertainties related to private pensions will become more important, raising questions about the division of responsibilities between public and private pensions, and about the potential of mitigating such risk through pillar interaction. These concerns are further reinforced by labour market changes. Although a pension system free of distortions is inconceivable, this article seeks to contribute to addressing how mitigation should be designed, and how mitigation and risk sharing should be balanced against incentives, challenges which are as much political as technical.     

Income redistribution in 20 countries over time

In most OECD countries, the gap between rich and poor has widened over the past decades. The present study analysed whether and to what extent direct taxes and social transfers contribute to this trend. The study contributes to the literature by disentangling several parts of fiscal redistribution in a comparative setting. We used micro‐data from the Luxembourg Income Study to examine household market inequality and redistribution from transfers and taxes for 20 countries from the mid‐1980s to the mid‐2000s. The contribution of each programme was estimated using a sequential accounting budget incidence decomposition technique. We observed a sizeable increase in primary household inequality, but tax‐benefit systems have offset two thirds of the average increase in primary income inequality. The public old‐age pensions attributed 60 per cent to the increase in redistribution, while social assistance accounted for 20 per cent. Direct taxes slowed down redistribution by 16 per cent.     

The old‐age pension law in Mexico: The promise of poverty in old age?

In 1997, Mexico replaced its main old‐age pension system with an individual capitalization system. In 2021, the first people subject to the new system will retire. Using a model that projects demographic and labour variables and using Monte Carlo simulations, the findings of this study show that in 2051 the percentage of men not having a pension will increase from 38 per cent to 59 per cent, and that of women from 44 per cent to 66 per cent. The replacement rate for the average Mexican worker will fall from 70 per cent to 30 per cent. The numbers of people in extreme poverty will increase by almost 2.8 million, representing 9.44 per cent of the population. Alternative scenarios are proposed that involve increasing the contribution rate and raising the retirement age.     

Pension reform in the Baltic States: Convergence with “Europe” or with “the world”?

Abstract The Baltic States – Estonia, Latvia and Lithuania – join the European Union in 2004. This paper examines pension reform in the three countries over the past decade in the light of the “European social model” and the “World Bank model”. Part one seeks to define these two models. It shows how the former emphasizes income adequacy and solidarity while the latter stresses fiscal sustainability, savings and economic growth. Part two looks at reforms made and proposed. Initial reforms involved raising the retirement age and relating benefits more closely to earnings and service. This resulted in the establishment of pension systems similar to those in many European countries. Subsequent reforms involved attempts to shift from a publicly financed, purely “pay‐as‐you‐go” system to one based upon “funding” and private, individual accounts. Such systems have been promoted by the World Bank. The appropriateness of this approach – its high transition costs, potentially high administration costs, and longer‐term implications for the relative income status of retired people – is questioned. Part three draws conclusions. In the short and medium term, policymaker should safeguard income adequacy rather than seek the doubtful advantages of funding – in other words, look more to “Europe” than to “the world”.     

The distributive impact of private pensions in the context of the institutional designs of public pension systems across OECD countries

Income inequality has been increasing across the developed world for the last few decades. The welfare state has played an important role in reducing income inequality, but it has now entered into an era of transformation. The shift from public to private pension schemes is one of the main policy instruments in this shift. An increase in private pensions is expected to create an increase in income inequality. Therefore, using data from OECD SOCX, this study examined how the effect of private pensions on income inequality might be changed by the institutional design of public pension systems. The results suggest that the effect of private pensions differs when the institutional design of the public pension system is considered. An increase in private pensions is related to an increase in income inequality when the public pension has a low level of coverage and a high level of earnings‐relatedness.     

The mandatory private pension pillar in Hungary: An obituary

In 1998, the left‐of‐centre government of Hungary carved out a second‐pillar mandatory private pension scheme from the original mono‐pillar public system. Participation in the two‐pillar system was optional for those who were already working, but mandatory for new entrants to the workforce. About 50 per cent of the workforce joined the second pillar voluntarily and another 25 per cent were mandated to do so by law between 1999 and 2010. The second pillar has not improved the financial stability of the social security system. Moreover, the international financial and economic crisis has highlighted the transition costs that are associated with moving, even if only partially, to a system of pre‐funding. In 2010, the conservative government de facto “nationalized” the second pillar, and it is to use part of the accumulated pension capital to reduce Hungary's excessive public debt and annual budget deficit and to compensate for income tax reductions.     

Pension privatization in crisis: Death or rebirth of a global policy trend?

From 1981 to 2007, more than thirty countries worldwide fully or partially replaced their pre‐existing pay‐as‐you‐go pension systems with ones based on individual, private savings accounts in a process often labelled “pension privatization”. After the global financial crisis, this trend was put on hold for economic, ideational, and institutional reasons, despite a rise in critical indebtedness that has facilitated pension privatization in the past. Is the global trend towards pension privatization dead or in the process of being reborn, perhaps in a somewhat different form? Several recent trends point to rebirth as policy‐makers scale back public and private pension systems, attend to minimum pensions and “nudge” rather than mandate people to save for retirement.     

Notional defined-contribution schemes: Old wine in new bottles?

Until recently, most pension benefit formulae in social security schemes resembled each other. They were all defined-benefit formulae that were either generous or mean, while defined-contribution formulae were exclusively used in private and occupational pension schemes and some national provident funds. Then came the mandatory retirement savings model, introduced in Chile and subsequently in other Latin American countries. It did not seem possible that such a formula could be used on any large scale in the pay-as-you-go environment of OECD pension schemes. In the early 1990s, however, Swedish social security experts devised the notional defined-contribution (NDC) system: individual social insurance pension contribution records are converted into a fictitious savings amount at retirement, whereupon the defined-contribution approach is followed. This article analyses how much of this approach is new. The conclusion is that it is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined-benefit formula. It is the packaging that differs and, in politics, that often is what matters.     

Public/Private Pension Mix,Income Inequality and Poverty among the Elderly in Europe: An Empirical Analysis Using New and Revised OECD Data

Prior studies have suggested that higher public pensions are associated with lower income inequality among the elderly, whereas the reverse is true for private pensions. Van Vliet et al. ( 2012 ) empirically test whether relative shifts from public to private pension schemes entail higher levels of income inequality among the elderly using panel data from the OECD SOCX and the EU‐SILC databases. Contrasting earlier empirical studies using either cross‐sectional or time‐series data, they do not find evidence that shifts from public to private pension provision are associated with higher levels of income inequality or poverty among the elderly. The aim of the current article is to extend the analysis of Van Vliet et al. by: (1) adding additional countries; (2) adding additionally available years; and (3) using revised OECD SOCX data. In contrast to Van Vliet et al., we find that a greater relative importance of private pensions is associated with higher levels of income inequality and poverty among the elderly. A central explanation of the difference in conclusions stems from the revision of OECD SOCX data.     

Between labour market and retirement pension — flexible transition as a new paradigm for ageing societies?

Increasing the pensionable age due to rising life expectancy meets strong political resistance. For health and labour market reasons it will always be impossible for some to achieve full pension eligibility directly from employment. Even if early retirement options are not restricted the scope for an accumulation of earnings to fund an early pension is often narrowly defined. Consequently, it is impossible for early retirees to compensate for the reductions in the pension they receive. Contrary to the general tendency to increase the pensionable age an alternative reform proposal is currently under discussion in German social policy circles. This involves free choice of retirement at age 60; unlimited accumulation of additional pension entitlements whilst earning; actuarial deductions for early retirement; and consideration of life expectancy in making adjustments to pension awards. This solution relieves the public pension system financially, raises the attractiveness of senior citizens on the labour market, offers the opportunity for a self‐determined transition from work to retirement and reduces political resistance to pension reform. The effect on the labour market for senior citizens remains to be examined.     

Regulation and supervision of pension funds: Principles and practices

This paper examines the current principles and practices of pension fund regulation and supervision around the world. First an overview of the main approaches in OECD and non-OECD countries and the most important issues and their relevance for different types of pension plans will be given. Then the paper will focus on a selection of issues which are the subject of intense debate at the moment, particularly in the Latin American context: the imposition of quantitative restrictions on pension fund investments, state guarantees for private pensions, and fee and cost controls.     

Employers and the Management of Retirement

In the UK early withdrawal from the labour market is seen as a risk and a cost, worsening the dependency ratio, raising public and private pension costs and threatening additional welfare expenditure over the longer term. Explanations of the retirement process have focused on the welfare state and the impact of pensions and other social security policies. This paper argues that a missing actor in these accounts is the employing organization. Early retirement in the UK has been predominantly driven by the labour requirements of employers rather than state policies to encourage older workers to take early retirement. There is a case for arguing that significant change in retirement behaviour in the UK will come primarily from the modification of employers’ policies. This research is a case study of three employers: one public‐sector and two commercial. It examines the dynamics of the retirement decision. This paper reports the public‐sector case. The findings indicate that employers, in order to reduce their pensions liabilities and stem the cost of early retirement, are trying to regain control of the retirement process. The employees interviewed felt they experienced little choice concerning their retirement, had limited knowledge of the options open to them and found pensions complicated and confusing.     

Second‐pillar pensions in Central and Eastern Europe: Payment constraints and exit options

During 1998–2007, a majority of Central and Eastern European (CEE) governments enacted laws obligating workers to save for retirement in privately managed individual accounts. The governments funded these accounts with a portion of public pension revenues, thus creating or increasing deficits in public systems. After the onset of the global financial and economic crisis (2008), most CEE governments reduced these funding diversions and scaled back the accounts. Now, a decade after the crisis, this article examines the benefits that the accounts are beginning to pay retiring workers. In general, these benefits are shown to be disadvantageous compared with public pensions. Some pay lump sums in lieu of regular monthly benefits, most fail to adjust pensions regularly for inflation, and some pay women less than men with equal account balances. In several countries, pensioners with individual accounts receive lower benefits than those without them. To enable retiring workers to avoid these disadvantages, several CEE governments have allowed them to refund their account balances and receive full public pensions. Yet while this strategy diffuses worker dissatisfaction, it also places strains on public pension finance. To assist second‐pillar account holders without weakening public pensions, governments should consider making private pension savings voluntary and financing these schemes independently of public pensions – i.e. by worker and employer contributions and, possibly, direct state support.     

Effectiveness of Social Welfare Programmes in East Asia: A Case Study of Taiwan

Using the 2008 Family Income and Expenditure Survey, this study examined the effectiveness of social welfare programmes in Taiwan. The empirical evidence shows that most types of social welfare spending were limited in 2008. However, the social welfare programmes that were in place substantially reduced income inequality in Taiwan. Using the Organisation for Economic Co‐operation and Development (OECD) poverty threshold, the results reveal that 14 per cent of the sample's families were poor in terms of market income, but this figure decreased to 7 per cent after government intervention. Income inequality in Taiwan was similar to that of other East Asian countries such as Japan and South Korea, but Taiwan spent much less money on social welfare programmes than OECD countries, and therefore Taiwan's reduction of poverty was much lower as well.     

The ABCs of nonfinancial defined contribution (NDC) schemes

Nonfinancial defined contribution (NDC) pension schemes have been successfully implemented since the mid‐1990s in a number of European countries such as Italy, Latvia, Norway, Poland and Sweden. The NDC approach features the lifelong contribution–benefit link of a financial defined contribution (FDC) personal account scheme, but is based on the pay‐as‐you‐go (PAYG) format. At its start out, the PAYG commitments of the preceding defined benefit (DB) system are converted into individual personal accounts, allowing for a smooth transition from the DB to the DC format, while avoiding the very high transition costs inherent in a move from a traditional PAYG DB scheme to a fully funded FDC scheme. The NDC approach implemented by the rule book is able to manage the economic and demographic risks inherent to a pension scheme and, by design, creates financial sustainability. As in any pension scheme, the linchpin between financial stability and adequacy is the retirement age; in the NDC approach the individual retirement age above the minimum age is by design self‐selected and by incentives should increase the effective retirement age in line with population ageing. As a systemic reform approach NDC has become a strong competitor to piecemeal parametric reforms of traditional nonfinancial DB (NDB) schemes. While frequent, these reforms are far from transparent and usually too timid and too late to create financial sustainability while providing adequate pensions for the average contributor. This article offers a largely non‐technical introduction to NDC schemes, their basic elements and advantages over NDB schemes, the key technical frontiers of the approach, and the experiences of NDC countries.     

A macro‐financial analysis of pension system reforms in emerging Europe: The performance of IRAs and policy lessons for Serbia

The article explores the initial macro‐financial performance of partial pension system “privatizations”— involving privately‐managed individual retirement savings accounts (IRAs) — undertaken in many emerging European countries. Using empirical data for a period of close to a decade, the evidence shows that returns on privately‐managed IRAs have been below the implicit rate of return of public pay‐as‐you‐go (PAYG) systems. High operating costs and undeveloped capital markets are identified as major contributing factors to the failure of privately‐managed IRAs to meet reform expectations. In light of empirical evidence, Serbia is advised to focus on parametric PAYG reforms and to avoid reforms that involve the partial “privatization” of the pension system.     

The decline of substitute pathways into retirement: Empirical evidence from the Dutch health care sector

Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of “substitute pathways” into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of “substitute pathways” has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.     

The performance of social security contributory and tax‐financed pensions in Central America,and the effects of the global crisis

Over the last 30 years, Latin America has pioneered structural pension reforms. This article focuses on a representative regional sample of seven Central American countries with diverse levels of development (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) studying contributory and tax‐financed pensions as well as recent pension reforms. It comparatively assesses system performance regarding five social security principles: unity; universal coverage; adequacy of benefits; equal treatment, solidarity and gender equality; and financial sustainability. It also evaluates the impact of the world crisis on these pension systems, highlighting the differences between public and private pensions, and extracts lessons and suggests policies for the future.     

The challenge of pension reform in Georgia: Non‐contributory pensions and elderly poverty

Georgia's national social security system offers almost universal non‐contributory basic pension coverage. The basic pension has, to date, proved effective in dealing with old‐age poverty. But Georgia's fiscal constraints and ageing population also highlight the importance of improving the pension system, in order to ensure its sustainability. This article presents policy reform choices, which suggest that, in Georgia, pension reform might include increasing the statutory retirement ages and reducing the generosity of benefits through means testing. The case of the Georgian non‐contributory basic pension might hold value for some low‐ and middle‐income countries that are considering the implementation of, or expanding coverage under, a non‐contributory pension programme.