Sustainability of Pension Systems in the New EU Member States and Croatia
Description
This study finds that pension reforms in recent years have improved the efficiency and sustainability of pension systems in the new member states of the European Union and Croatia. However, for many countries, these probably have not gone far enough to ensure long-term sustainability, given the aging of the population. Reforms have included changes to Pay-As-You-Go (PAYG) systems, including increases in retirement ages (not at least for women), new benefit formulas, and new indexation mechanism. Some countries (Latvia and Poland) have further strengthened the link of contributions and benefits to the sustainability of the PAYG system through the introduction of national defined contribution accounts. The link is strengthened also by moving to a point system, which has been adopted by many of the countries. Several countries have introduced a second, private, pension pillar, funded through diversion of part of the pension contributions, thereby diversifying risk. However, some countries (in particular the Czech Republic, Slovenia, and Romania) will need to do more to safeguard the long-term viability of their pension systems, while others face challenges to ensure equitable pension systems and adequate living standards for all elderly people.
Informations
| Publié par | world-bank-publications |
| Publié le | 01 février 2008 |
| Nombre de lectures | 13 |
| EAN13 | 9780821373705 |
| Langue | English |
Extrait
W O R L D B A N K W O R K I N G P A P E R N O . 1 2
Sustainability of Pension Systems in the New EU Member States and Croatia Coping with Aging Challenges and Fiscal Pressures
Leszek Ka˛sek Thomas Laursen Emilia Skrok
THE WORLD BANK
9
W O R L D B A N K W O R K I N G P A P E R N O . 1 2 9
Sustainability of Pension Systems in the New EU Member States and Croatia
Coping with Aging Challenges and Fiscal Pressures
Leszek Ka˛sek Thomas Laursen Emilia Skrok
THE WORLD BANK Washington, D.C.
Copyright © 2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First Printing: January 2008 printed on recycled paper 1 2 3 4 5 11 10 09 08 World Bank Working Papers are published to communicate the results of the Bank’s work to the development community with the least possible delay. The manuscript of this paper therefore has not been prepared in accordance with the procedures appropriate to formally-edited texts. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the International Bank for Reconstruction and Development/The World Bank and its affiliated or ganizations, or those of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The Wor ld Bank of the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission promptly to reproduce portions of the work. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, Tel: 978-750-8400, Fax: 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, Fax: 202-522-2422, email: pubrights@worldbank.org. ISBN-13: 978-0-8213-7369-9 eISBN: 978-0-8213-7370-5 ISSN: 1726-5878 DOI: 10.1596/978-0-8213-7369-9 Cover photo by Krzysztof Ko odziej. Leszek Ka˛sek is an Economist in the Poverty Reduction & Economic Management sector unit of the Europe & Central Asia regional department of the World Bank. Thomas Laursen is a Lead Economist in the same unit. Emilia Skrok is an Economist in the same unit. Library of Congress Cataloging-in-Publication Data Ka˛sek, Leszek. Sustainability of pension systems in the new EU member states and Croatia: coping with aging challenges and fiscal pressures / Leszek Ka˛sek, Thomas Laursen, Emilia Skrok. p. cm.—(World Bank working paper ; no. 129) Includes bibliographical references and index. ISBN 978-0-8213-7369-9—ISBN 978-0-8213-7370-5 (electronic) 1. Pensions—European Union countries. 2. Pensions—Croatia. I. Laursen, Thomas. II. Skrok, Emilia. III. World Bank. IV. Title. HD7164.K37 2008 331.25 ′ 2094—dc22
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Contents
M Page iii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
1. Overview of Current Pension Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Recent Pension Reforms in the EU10 + 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Current PAYG Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Experience with Second Pillar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2. Medium-Long Term Sustainability of Pension Schemes . . . . . . . . . . . . . . . . . . . . . 27
3. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9 L IST OF T ABLES 1. Retirement Ages in the EU10 + 1 in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Structure of Pension Systems in the EU10 + 1 Countries . . . . . . . . . . . . . . . . . . . . . . . 7 3. Basic Characteristics of Mixed Old-age Pension Systems . . . . . . . . . . . . . . . . . . . . . . 8 4. Gross Replacement Rates in Mid-1990s and Mid-2000s, Percent . . . . . . . . . . . . . . . 11 5. Basic Demographic and Labor Market Characteristics by Gender . . . . . . . . . . . . . . 12 6. Indexation of Pensions in Selected European Countries . . . . . . . . . . . . . . . . . . . . . . 13 7. Contribution Bases for Self-employed, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8. Cross-subsidization of Self-employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 9. Implicit Individual IRR of the Pension Systems in the EU10 + 1 Countries, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 10. Social Insurance Balance, Percent of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11. Financial Indicators of Agricultural Social Insurance Fund (KRUS) in Poland in 2000–05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 . . . . . . . . 12. Asset Allocation of Private Pension Funds, 2004 (percent) . . . . . . . . . . . . . . . . . . . . 22 13. Switching to the Second Pillar and Revenue Losses to the PAYG System, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14. Regulatory Administrative Charges to Second and Third Pillar Pension Funds, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 15. Average Real Rate of Return on Investment of Assets in Private Pension Pillar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 16. Old-age Pension Expenditure: Current Situation and Prospects . . . . . . . . . . . . . . . 30 17. Long-term Sustainability of Public Finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
iii
iv
18. Implied Replacement Rates (Illustrative) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 19. Theoretical Replacement Rate of a Male Worker . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
L IST OF F IGURES 1. Pension Expenditure in 1996–2004, percent of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2. Breakdown of Pension Expenditure in 2004, percent of GDP. . . . . . . . . . . . . . . . . . . 9 3. Employment Rate of Older Workers (ages 55–64) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4. Average Exit Age from the Labor Force Weighted by the Probability of Withdrawal from the Labor Market. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5. Benefits per Year of Service (Accrual Rates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6. Pension Contribution Rates in Selected European Countries . . . . . . . . . . . . . . . . . . 14 7. Pension Contribution Rates and Shares of Undeclared Work in the EU10 + 1 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8. Implicit IRRs and Shares of Undeclared Work in the EU10 + 1 Countries . . . . . . . . 19 9. Population Aged 65 + Years, Percent Change Relative to 2004 . . . . . . . . . . . . . . . . . . 28 10. Eurostat Projections of Old-age Dependency Ratio in Europe . . . . . . . . . . . . . . . . . 28 11. Projected Average Replacement Rate for Old-Age Pensioners in Romania (Percent of Average Wage) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12. Projected Replacement Rates in Croatia 2000–40. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
v
Acknowledgments
T benefited from valuable comments from Zo ran Anusic, Christian Bodewig, Bernard Funck, Stella Ilieva, Matija Laco, Anton Marcincin, Catalin Pauna, and Sanja Madzarevic-Sujster. The report is part of a series of studies on current issues in public finance reform in the new EU Member States which joined the European Union on May 1, 2004 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia), those which joined the EU on January 1, 2006 (Bulgaria and Romania), and Croatia. These studies have been undertaken since 2005 and coordinated by Thomas Laursen, Lead Economist for Cen-tral Europe and the Baltic States in the World Bank. Marta Michalska provided excellent administrative and logistical support throughout the process of preparing these studies.
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C H A P T E R 1
Overview of Current Pension Systems
Recent Pension Reforms in the EU10 + 1 Over the last decade, pension reform has been a major issue on the political agenda across Europe. All European countries are profoundly affected by aging populations resulting from lower fertility and increased life expectancy. In order to make pension systems more sus-tainable in light of prospective demographic developments, and in some cases to address cur-rent financing problems, EU10 + 1 countries have been reforming their pension systems since the mid-1990s. The reforms have combined measures to delay retirement, link benefits more closely to contributions, and diversify risk. While all EU10 + 1 countries have made changes to their public pay-as-you-go (PAYG) system, some have gone further by diverting some of the pension contributions to fully-funded, privately-managed pension savings. In most countries, switching to the new mixed system has been mandatory for younger workers and new entrants to the labor market. All countries have also introduced voluntary, supplementary pension schemes. PAYG reforms have included increases in retirement ages (including bringing the retire-ment age for women more in line with that of men), reducing possibilities and incentives for early retirement, scaling back privileges for special groups, revising benefit accrual formulas, changing indexation mechanisms, and increasing contribution periods or rates. Two coun-tries (Latvia and Poland) have fundamentally reformed their PAYG systems through the introduction of individual Notionally Defined Contribution accounts that link benefits
1
2 World Bank Working Paper
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directly to contributions and spread retirement benefits over the remaining life expectancy at the time of retirement 1 . Still, current retirement ages in all EU10 + 1 countries remain lower for women than for men and in some cases are dependent on the number of children raised, varying from about 54 years in Slovakia and Slovenia to 60 years in Poland (Table 1). For men, retirement ages vary from 58 in Slovenia to 65 in Poland. While no further changes are planned in Poland, all other EU10 + 1 countries have approved gradual increases in retirement ages for women and in some cases for men too: retirement ages for both women and men will generally increase to 62–65 years. Several countries have early retirement schemes allowing for retire-ment two or three years before the statutory age (in Latvia and Croatia, as much as five years). Some countries (such as Lithuania in 1995 and the Czech Republic in 1990–92 and 1995) have eliminated early retirement privileges for certain professional and social groups, while these remain in other countries (including Poland, Croatia, and Romania). Poland, Hungary, Latvia, Estonia, Lithuania, Romania and Croatia and most recently Slo-vakia have introduced a second pension pillar through the diversion of part of the pension contributions to fully funded, privately managed pension plans (Table 2). The new, mixed sys-tems are mandatory for at least all younger workers or new entrants to the labor market in all countries except Lithuania where participation is voluntary, even for new entrants. 2 The introduction of such mixed systems has been motivated mainly by risk diversifica-tion (spreading of wage bill and political risk to include financial market risk), but also the provision of greater incentives to contribute through a closer link between contributions and benefits, increased individual choice, capital market development, and expected higher rates of return. It is also sometimes hoped that the inflow of pension funds’ portfolio invested in private equities will boost aggregate investment rates, and improves prospects for economic growth rate in the future. At the same time, the switch from pure PAYG to mixed systems involves greater indi-vidual risks (investment risk), potentially higher transaction costs (fees to fund managers), and transition costs to the PAYG systems as part of contributions are diverted to private sav-ings and partially invested in non-governmental financial instruments 3 while current pen-sioners must still be fully financed from the PAYG system. The countries which have adopted mixed systems have sought to limit these transition costs through making the switch mandatory only for younger people and phasing in gradu-ally higher contribution rates to the funded pillar. For example, Hungary began the funded pillar with a 6 percent contribution rate compared to the current 8 percent. Given the con-cern in the EU10 + 1 countries for maintaining fiscal discipline, none of the countries opted for an immediate or complete shift to the second pillar such as Mexico or Kazakhstan did.
Current PAYG Systems Despite the reform efforts which have been undertaken, PAYG pension expenditures (as a share of GDP) have remained high and fairly constant until now (Figure 1). In 2004, Poland’s expen-
1. Such a system was initially developed by Sweden, but has been followed by some other countries in Europe (for example, Italy). 2. In Hungary, where participation in the new system was mandatory for everyone, retirees who joined the new system less than 10 years before retiring and whose benefits from the second pillar are less than 25 percent of the PAYG benefits have recently been granted the option of moving back to the previous stand-alone PAYG system until 2012. 3. See more in Table 12.
Table 1. Retirement Ages in the EU10 + 1 in 2007
Hungary Women
Men
Poland Women
Retirement Age Current Law Years of Insurance
62
62
60
1st pillar: 15 years 2nd pillar: no minimum period
1st pillar: 15 years 2nd pillar: no minimum period
20—with guaranteed mini-mum pension. Without guaranteed min. pension: persons born before 1.1.1949—15; persons born since 1.1.1949—no min. period is required.
Planned
Introduction
Early Retirement
Available to those involved in jobs allowing exemption by age. Entitlement to pension starts 2 years earlier to those who have worked in such activities for at least 8 years and pensionable age is further reduced by 1 year for every additional period of 4 years. Available to those involved in jobs allowing exemption by age. Entitlement to pension starts 2 years earlier to those who have worked in such activities for at least 10 years and pensionable age is further reduced by 1 year for every additional period of 5 years.
Persons born before 1.1.1949—55 and over with a 30-years qualifying period. Persons born since 1.1.1949—no provisions
( continued )
Table 1. Retirement Ages in the EU10 + 1 in 2007 ( Continued ) Retirement Age Current Law Years of Insurance Men 65 25—with guaranteed mini-mum pension. Without guaranteed minimum pen-sion: persons born before 1.1.1949—20; persons born since 1.1.1949—no min. period is required.
Planned
Czech Republic Women 56 to 60, 25 years of insurance; 63 (without children) according 15 years if aged 65 59–62 (differentiated to the acc. to the number of number children brought up) of children Increasing by raised 4 months annually or by two months annu-ally once women reach the retirement age for eligibility for the old-age pension of men 63 (increasing by 2 months annually)
Men
61.8
Introduction
Early Retirement Valid for both men and women born before 1.1.1949: totally incapacitated persons may receive pension 5 years early if they have ful-filled the qualifying period requirements; persons working in unhealthy conditions or performing a specified type of work (official list)—5 (e.g. rail workers), 10 (e.g. miners, steel workers, pilots) or 15 years early (wind instrument musicians). Persons born since 1.1.1949—no provisions
2013 up to 3 years before the normal retirement age
2013 up to 3 years before the normal retirement age
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