The effects on intra‐generational inequality of introducing a funded pension scheme: A microsimulation analysis for Estonia

This article uses a single male cohort microsimulation model to analyse the intra‐generational and distributional effects of a shift in Estonia from a defined benefit pay‐as‐you‐go (PAYG) pension system to a multi‐pillared system with a PAYG scheme with contribution‐based insurance components and a funded pension scheme. We contribute to the literature on microsimulation by showing how introducing contribution‐based insurance components and compulsory defined contribution (DC) schemes can increase pension inequality. Our results show that in the case of a high level of inequality in labour earnings and high long‐term unemployment rates, such as in Estonia, the introduction of a very strong link between contributions and future benefits leads to considerably higher inequality in pension incomes as measured by the Gini coefficient. Simulation results for Estonia suggest that inequality in old‐age pension incomes more than doubles when the reforms mature. In contrast, the inequality in replacement rates decreases.     

Extending social security coverage to the rural sector in China

In late 2009 China launched an innovative, voluntary programme that by 2011 had extended pension coverage to 326.4 million people in the rural sector, including contributors and beneficiaries. It requires one contribution per year and provides a flat‐rate benefit and a contributions‐related benefit through a contributory individual account, with a government guarantee that the benefit will continue for life. The programme encourages participation of persons who do not pay income taxes, and thus have no tax incentive to participate, by providing substantial government subsidies. As a further incentive, old‐age benefits are provided to older parents when all their adult children participate in the contributory programme.     

Lessons from China on different approaches to pension coverage extension

Achieving universal pension coverage is both an aspiration and a challenge for many developing economies. Traditional contributory schemes are less effective in extending pension coverage to workers who are not in the formal sectors of the economy. As an alternative, non‐contributory schemes have gained popularity in recent years. China’s pension reforms mirror this global trend. The introduction of a contribution‐based pension scheme for urban employees (Employees’ Pension) was followed by a scheme for rural and urban residents (Residents’ Pension), which is partly government financed and partly contributory, with multiple options for premium payment. This study uses nationally representative survey data collected in 2016 to compare the inclusiveness of the two schemes. It finds that access to the Residents’ Pension scheme is more equal than the Employees’ Pension. Lower status workers in terms of education, employment, income and hukou‐migration are more likely to participate in the Residents’ Pension as opposed to the Employees’ Pension, compared with higher status workers. The Chinese experience suggests that a workable solution for pension extension in low‐ and middle‐income countries is to have a scheme that is flexible, affordable and responsive to the diverse needs of the population.     

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.     

Inequity in access to the Argentinian pension system (1994–2017)

Pension coverage in Argentina is inequitably distributed between different income levels, both during working years and during retirement. The objective of the article is to study the evolution of inequity in access to the Argentinian pension system in terms of its association with the socio‐economic status of individuals during the period 1994–2017. An evaluation is offered of how variables such as sex, age, and educational attainment influence such inequity. It is concluded that, although the level of average coverage increased, inequity in access increased significantly in the years following the 1994 reform, both among the active and the inactive population. However, inequity in access among active persons did not improve substantially with the return to the pay‐as‐you‐go pension system, while it was considerably reduced among the inactive population. While the former are found to be affected to a greater extent in terms of coverage as a result of the pro‐educated bias among the active population, the latter outcome is thought to be a direct result of the transitory plan (Pension Inclusion Plan) for pension inclusion, after which inequity was to resume its upward course.     

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.     

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.     

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.     

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.     

Pension reforms in Chile and social security principles, 1981–2015

Chile pioneered in Latin America not only the introduction of social security pensions, but the structural reform that privatized them and a process of “re‐reform” implementing key improvements. A Presidential Commission in Chile, appointed in 2014 to evaluate reform progress and remaining problems in the pension system, released its report in September 2015. In light of the Commission's findings, the article assesses Chile's compliance with International Labour Organization social security guiding principles: social dialogue, universal coverage, equal treatment, social solidarity, gender equity, adequacy of benefits, efficiency and affordable administrative cost, social participation in management, state role and supervision, and financial sustainability. The exercise follows three stages: the structural reform (1981–2008), the re‐reform (2008–2015), and the Presidential Commission proposals (2015)     

Pensioners among Chinese elderly

The pension system is one type of social welfare system which provides support for elderly citizens after retirement. The system in the People's Republic of China was established in the 1950s, mainly for state employees and employees of privately owned enterprises, while peasants relied on their land to support them in their old age. Up to the 1970s, there was little change in this system. However, the system has since undergone dramatic reform. The implication of the new system for the future elderly in China will be significant. This paper discusses the current impact of the pension system on the elderly in China. According to our analysis, fewer than 25% of Chinese elderly receive a pension. The social and demographic characteristics (e.g. age, gender, residence, educational attainment, occupation) of pension recipients are partially a legacy of past policies. As new policies are implemented and the pension system improves, more elderly will be covered by the pension system. Nonetheless, we need to find ways to support those who do not receive a pension.     

Transferring from the poor to the rich: Examining regressive redistribution in Chinese social insurance programmes

Social insurance promotes progressive redistribution through risk pooling and cross‐subsidy. However, in China, risks and protection are mismatched, with benefits and protection accruing to the privileged while high‐risk groups are inadequately protected. This article reports on a study of the sources of regressive redistribution in Chinese pension, health and unemployment insurance programmes, and discusses the possible cause of this redistribution paradox. It argues that the government has adopted different strategies for welfare reform towards different socioeconomic groups. For the core groups, such as public employees, reform has been characterised by replacing old programmes with new (i.e., a replacement strategy). For marginal groups, the government has handed off its responsibilities to individuals and the market (a retrenchment strategy). This political pecking order of welfare reform is the cause of distorted distributional outcomes. As social policy programmes continue to spread in developing countries, China's case illustrates that they may reinforce existing disparities rather than realise progressive redistribution, risk management and social inclusion.     

The sustainability of China’s Urban Employees’ Pension Programme: A case of getting old before getting rich?

This article examines the sustainability of China’s Urban Employees’ Pension Programme – the main component in China’s overall old‐age support system. It looks at the sustainability of the programme generally and, in particular, at case studies of two areas (Tianjin municipality and Guangxi province) to highlight both the extent of regional variations and the common challenges facing Chinese policy‐makers. It discusses a number of key issues that should assist policy‐makers to address the challenge of population ageing. It concludes that the challenge facing China is no more severe than that already faced by other countries in Europe and Asia. Moreover, the ageing of the population is not uniform across the regions of China. Consequently, those areas where the demographic shift is more advanced will provide some opportunity for policy experimentation. Given the experience to date of slow progress on various aspects of pension policy reform, the article suggests that it seems unlikely that paradigmatic change will be significant. Nonetheless, the study suggests a range of parametric policy measures that China should consider. The challenge facing China’s policy‐makers is to ensure that China gets old and rich at the same time.     

An actuarial balance sheet of the Swiss old‐age pension scheme

Following the recent update of the international System of National Accounts (2008 SNA), internationally comparable estimates of accrued‐to‐date pension liabilities (ADL) of unfunded social security pension schemes will soon be available in the supplementary table to the National Accounts. Against this background, this article analyzes the medium‐term sustainability of the Swiss old‐age pension scheme (Alters‐ und Hinterlassenenversicherung – AHV). This is achieved by estimating a “Swedish” actuarial balance sheet, which compares pension liabilities with the explicit and implicit assets of the pension scheme. Our results show that the current financing of the AHV is unsustainable, with about 30 per cent of the liabilities not backed by corresponding assets. In order to close this financing gap either the contribution rate should rise from 8.4 per cent to 12 per cent or all pension liabilities should be cut by about 38 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.     

Reforming against all odds: Multi‐pillar pension systems in the Czech Republic and Romania

Attempts to replace pay‐as‐you‐go pension schemes with private funded systems came to a halt in Central and Eastern Europe after 2005. However, more recently, the region has witnessed two belated reformers: the Czech Republic and Romania. Both countries decided to partially privatize pensions despite the rising tide of evidence concerning the challenges associated with the policy. We argue that while part of the domestic political elite remained supportive of private funded pensions, the difficulties experienced by earlier reformers and reduced support from International Financial Institutions led to the adoption of small funded pension pillars. Such cautious attempts at privatization might become more common in the future as large reforms have proven politically unsustainable.     

A “Swedish” actuarial balance for a notional defined contribution pension scheme with disability and minimum pension benefits

This article proposes a “Swedish” type actuarial balance sheet (ABS) for a notional defined contribution (NDC) scheme with disability and minimum pension benefits. The proposed ABS splits the pension system in two parts: the pure NDC part and the redistributive part, which includes the assets and liabilities originating from non‐contributory rights. The article contains a numerical example that sheds light on the real applicability of our proposal. The model has practical implications that could be of interest to policy‐makers, given that it integrates actuarial and social aspects of public pensions and discloses the real cost of redistribution through minimum pensions.     

Pension reforms in EU11 countries: An evaluation of post‐socialist pension policies

This article evaluates the pension policy pathways of the 11 former state socialist nations that have joined the European Union since 2004. Focusing primarily on the post‐2004 period, the analysis discusses the most important measurable outcomes of these countries’ pension reforms, in terms of poverty alleviation, pension adequacy and fiscal sustainability. Going beyond the quantifiable concepts, we also investigate the quality of the 11 countries’ pension systems in terms of equity as well as efficiency, emphasizing the less conspicuous design errors present in these systems. Although these errors have received little attention to date, they may harm pension schemes along several dimensions, including their fiscal sustainability.     

The Brazilian pension model: The pending agenda

To achieve national goals defined by the 1988 Brazilian Federal Constitution, cash benefits alone are insufficient in the absence of more robust social services to reduce inequalities and improve social cohesion. The Constitution, albeit of national importance and international significance, has not addressed many institutional and administrative weaknesses in the design of the national pension system. Although coverage has been increased and inequality reduced, these measures are not sufficient. Brazil's ambitions to further develop social policies (and, indeed, to live up to its accorded international status as a social policy leader) may be constrained by an over‐reliance on conditional cash transfers such as those provided under the Bolsa Família programme. Brazil faces a major political‐economy challenge in addressing all these issues because the policy reform process is difficult, and, more importantly, because of the embedded role of vested interests. Moreover, Brazil must tackle these issues in the face of growing fiscal pressures, which could weaken the current political legitimacy of social policy and undermine important recent successes.     

Social security for China's rural aged: a proposal based on a universal non‐contributory pension

Yang Y, Williamson JB, Shen C. Social security for China's rural aged: a proposal based on a universal non‐contributory pension Int J Soc Welfare 2010: 19: 236–245 © 2009 The Author(s), Journal compilation © 2009 Blackwell Publishing Ltd and the International Journal of Social Welfare. China's relative lack of social security coverage for rural elders exacerbates the already severe rural–urban economic disparity, slows the rate of rural poverty reduction, and raises social justice concerns. Our analysis draws on evidence from a number of sources including interviews with experts on China, Chinese government documents, Chinese newspaper accounts, and other sources from other countries. Based on our analysis of what has been tried in other countries and the current situation in rural China, we offer some suggestions for Chinese policy makers. We suggest that, for rural China, a universal non‐contributory old‐age pension deserves serious consideration, and refer to our proposed model as a Rural Old‐Age Social Pension. It will reduce the level of poverty in rural areas and the degree of income inequality between rural and urban areas while simultaneously promoting social and political stability.