Ageing, Demographic Risks, and Pension Reform

Revue de l'OFCE

The Nordic welfare states have managed to reform their pension systems in a way that supports both high employments rates and low old-age poverty. This ability to innovate and acquire acceptance for the new rules are the key elements behind the success of these systems. The role of social partners has been decisive in previous reforms, but the needs to increase employment rates and improve overall fiscal sustainability have introduced additional constraints for the reforms and have increased the influence of politicians. From the very beginning, the Finnish first-pillar earnings-related pension scheme has had several outstanding features, such as partial prefunding of the contributions, no ceilings for the pension accruals and preserving accruals when changing jobs. In recent years, the scheme has been at the front line of introducing links between pensions and retirement ages and life expectancy. However, the recent issue of the surprisingly low fertility has not yet been addressed.

Uncertain Demographics and Fiscal Sustainability

In anticipation of future gains in life expectancy, several countries have passed laws that automatically adjust pensions, if life expectancy changes. In this paper we study the effects of longevity adjustment under demographic uncertainty in Finland. If longevity increases, the adjustment decreases the contribution rate, and the reduction is bigger the higher the rate would have been without the reform. On the other hand, longevity adjustment increases the uncertainty in replacement rates. The current middle-aged generations, whose pensions are reduced more than contributions, are likely to experience the largest losses. The full gains are observed far in future. The quantitative results depend on, besides demographic realisations, the specifics of the pension system. Longevity adjustment significantly weakens the defined-benefit nature of the Finnish pension system and brings in a strong defined-contribution flavour.

In order to estimate labour supply responses among older people we have employed a very simple model of retirement decisions that can be estimated on a single cross-section sample, and still be given a structural interpretation in terms of inter-temporal decisions. The model is estimated on Norwegian register data from 1996, which covers all Norwegians aged 55-68 in 1996. The empirical model is employed to assess the impact on retirement of moving the Norwegian pension system towards actuarial fairness. Future annual pension benefits are increased if retirement is postponed say, for one year. In one of the simulations future annual benefits are increased by NOK 8,000 (as of April 2009 1 Euro~ NOK 8.7), which is around 5 per cent of the average pension benefit in 1996 and corresponds approximately to the adjustment in the new pension system which comes into effect 1. January 2011. The number of men and women choosing retirement is reduced by around 5 per cent, given that there is no ...

Intereconomics, 2020

Pension reform has been on the agendas of many European policymakers for the better part of the last three decades. While some EU countries have made sweeping reforms several years ago, others are currently in the process. Undoubtedly, most will need to re-evaluate their systems due to the coronavirus crisis, at least temporarily. With Europe's ageing populations, declining fertility rates and increasing life expectancy, the associated rise in the old-age dependency ratio puts strain on unfunded, pay-as-you-go pension systems. This implicit pension debt has important macroeconomic implications. Often politically controversial and subject to intense policy debate, pension reforms may reduce entitlements for some demographic groups of the population. This has lead to widespread public dissatisfaction among the affected groups. It is necessary to look at a country's history and key features of its pension system in order to understand the related policy discussion. This Forum analyses the effects of different pension arrangements-with a focus on the challenges, history and demographics of Finland, France, Germany and Italy-on labour markets, on national growth, and on the distribution of burdens and benefi ts.

1998

The objective of this paper is to provide the reader with a general understanding of how models work and how they should be used to properly analyse pension schemes. It aims to stress both the importance of modelling as a means of sound governance and planning and the need of a comprehensive quantitative modelling even for the analysis of a single branch of a national social protection system. As currently in use in the ILO for the study of pension reforms, three types of models will be addressed: a social budget model which maps the macro socio-economic environment as well as the social protection environment of pension systems; a pension model used to assess the long-term financial implications of alternative benefit provisions and alternative financing options; and an income distribution model which determines the distributive aspects of a pension system or reform options. To conclude, results of typical applications are illustrated in the final section of the paper as a way to i...

2000

This paper describes the recent Swedish reform and available options on major issues within this reform framework. In June 1994, Sweden's Parliament passed legislation replacing the old defined benefit system with a combination of a pay-as-you-go notional defined contribution (NDC) and a DC privately managed financial account scheme, based on a total contribution rate of 18.5 percent on earnings. The financial account scheme is run using a state-clearing house as a broker, and will have a state monopoly supplier of annuities. During the accumulation period, participants can choose among all registered funds, about 500 when they make their first choice in the autumn of 2000. Accounts were created in 1999, and two annual statements have been sent out since then.

2019

SNS, the Centre for Business and Policy Studies, is an independent think tank that brings together the worlds of academia, business and government for knowledge-sharing and dialogue on key societal issues. SNS provides a steady flow of independent research and analysis. The research takes a solution-focused approach to important policy issues. SNS mobilizes the best academic expertise from universities and research institutes in both Sweden and around the world. The quality, integrity and objectivity of SNS research are among our principal assets. Responsibility for the analysis and the conclusions in the research reports rest with the authors alone. Summary

2008

This study analyses the fiscal sustainability of the Finnish public sector using stochastic projections to describe uncertain future demographic trends and asset yields. While current tax rates are unlikely to yield sufficient tax revenue to finance public expenditure with an ageing population, if developments are as expected, the problem will not be very large. However, there is a small, but not negligible, probability that taxes will need to be raised dramatically, perhaps by over 5 percentage points. Such outcomes, if realised, could destabilise the entire welfare state. The study also analyses three policy options aimed at improving sustainability. Longevity adjustment of pension benefits and introduction of an NDC pension system would reduce the expected problem and narrow the sustainability gap distribution. Under the third option, pension funds would invest more in equities and expect to get higher returns. This policy also limits the sustainability problem, but only under precondition that policymakers in the future can live with substantially larger variation in the value of the funds without adjusting tax rules or benefits.

European Economy Economic Papers, 2007

This paper explores how the Stability and Growth Pact may cope with the future costs of population ageing in the European Union. Clearly, population ageing has forced countries to reform their pension systems, and will continue to do so, both by reducing the generosity of pension arrangements and by switching to funding rather than relying on pure pay-as-you go pension provision. We study how such reforms affect the room for adhering to the Pact, but also how the Pact may induce or hamper the incentives for reform. In our analysis we will draw on recent literature on the Pact and on the pensions and the ageing problem. We will also calibrate a simple model for addressing intergenerational equity.

Oxford Economic Papers, 1997

In this paper decision making on public pensions is modeled within the framework of the well-known two-overlapping-generations general-equilibrium model with rational expectations. The model is used to analyze the eects of aging on the evolution of public pension schemes. Analytical results are derived for the long run as well as for the short run by the met h o d o f c o m parative s t a tics and comparative dynamics respectively. This shows that the short-run consequences of a g ing depend crucially on the existing size of the PAYG-scheme. JEL Code: H55

2011

This chapter examines the economic and demographic factors that threaten the viability of European pension systems over the next 50 years. In the short to medium term, the principal challenge is indeed a structural rebalancing of public finances, by applying austerity measures and reducing reliance on debt-financing, while at the same time promoting jobs growth and minimizing adverse impacts on vulnerable population groups. In the longer term, population aging remains the key challenge, although its magnitude, speed and timing vary across the European countries under review. Longevity gains and falling fertility levels, especially in Central and Eastern European countries where emigration is another contributing factor, imply that the cohorts of elderly are growing in number just as the cohorts of working population supporting them are starting to decline. The implications on the size and shape of public services and finances as well as on future growth and on living standards are considerable. This chapter argues that a review of fundamentals is required, for all concerned-individual countries as well as EU institutions-in moving forward, by examining whether, and how, recent policy reforms compromise the pension income adequacy of future retirees, and what policies can improve the prospects for both the financial and social sustainability of public pension systems.

The Future of Multi-Pillar Pensions

This chapter examines the economic and demographic factors that threaten the viability of European pension systems over the next 50 years. In the short to medium term, the principal challenge is indeed a structural rebalancing of public finances, by applying austerity measures and reducing reliance on debt-financing, while at the same time promoting jobs growth and minimizing adverse impacts on vulnerable population groups. In the longer term, population aging remains the key challenge, although its magnitude, speed and timing vary across the European countries under review. Longevity gains and falling fertility levels, especially in Central and Eastern European countries where emigration is another contributing factor, imply that the cohorts of elderly are growing in number just as the cohorts of working population supporting them are starting to decline. The implications on the size and shape of public services and finances as well as on future growth and on living standards are considerable. This chapter argues that a review of fundamentals is required, for all concerned-individual countries as well as EU institutions-in moving forward, by examining whether, and how, recent policy reforms compromise the pension income adequacy of future retirees, and what policies can improve the prospects for both the financial and social sustainability of public pension systems.

Contemporary Economics, 2008

In the next decades, developed countries will experience dramatic changes in their demographic trends. The retirement of the wide baby-boom generations, the increase in life expectancy and the decline in fertility ratios are likely to modify the size and the age-structure of their populations. The expected population ageing in European countries will burden the pension systems, especially wherever the pay-as-you-go pillar is predominant. Recently, migration has received a widespread attention as a solution to expected population decline and ageing in these countries. The flow of (young) migrants to developed countries is perceived as a means to alleviate the financial burden of pension systems. The aim of this contribution is to clarify the issue of aging on labour and capital markets in a macroeconomic perspective. A special attention is given to the risk of imbalances in the financing of social protection in the context of demographic ageing.

International Business and Global Economy, 2015

The aim of this article is to present the principles of the Norwegian pension scheme, which is being reorganized since 1 January 2011 with regard to the acquisition and determination of pension rights and the possibility of combining work with pension in the light of demographic challenges. The phenomenon of an aging population (which is the result of, i.a., rising longevity and declining fertility rate) and the migration processes have become a serious threat to public pension systems of most countries. For this reason, they decided to implement radical reforms in the retirement security of citizens. Among these countries was also Norway, despite the fact that its liberal immigration policy, very high fertility rate and, primarily, the funds collected in the state pension fund seem to protect its pension system, as well as public finances, against the collapse. The choice of the subject was influenced by the growing popularity of Norway as a destination for employment and by the co...

2007

The relevant time horizon for pension policy is several decades. Therefore we know that the projected future demographic and economic trends that are used in forecasts are not likely to be realized. This leads to several interesting questions. How large is the uncertainty in pension variables, such as contribution rates and replacement rates? How the uncertainty affects the policy targets set and the policy instruments used? Is it possible to find and test policies or strategies, which affect both the expected value of the target variables and their distribution in a desired way? Answering to these questions necessitates the use of models, which describe the interaction of demographics, economic decisions and pension system rules. We show two examples of how numerical overlapping generations models can be used to simulate the effects of pension policy under uncertainty. The first studied policy is introduction of longevity adjustment, which cuts the pensions if life expectancy increases. The second policy is an amendment to prefunding rules, which allows more risky portfolios to pension funds.