Reforming public pensions : sharing the experiences of transition and other OECD countries.

328 Pages·2004·2.116 MB·English

by  OECD

«
Reforming Public Pensions
SHARING THE EXPERIENCES OF TRANSITION
AND OECD COUNTRIES
Reforming
Reforms to pension policies rank high on the policy agenda in many countries. Certain reforms
have already been undertaken and those proposed inevitably deal with a number of difficult
challenges and potential trade-offs. These include the desirability of providing adequate Public Pensions
replacement income and tackling problems of poverty in old age; the imbalance between time
spent in work and in retirement; the appropriate mix of different forms of retirement income
provisions; the labour market implications of different approaches to financing pensions; and
the potential complexities of meeting short-term and long-term policy objectives. This book
SHARING THE EXPERIENCES
addresses these and other issues through a critical appraisal of the practical lessons of public
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pension reforms over the past decade in Central and Eastern Europe, and how they compare e OF TRANSITION
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with reforms in other OECD member countries. Countries covered include the Czech Republic, o
AND OECD COUNTRIES
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Poland, Hungary, the Slovak Republic, Slovenia, Latvia, the Russian Federation and Lithuania, m
as well as Germany, Italy and the Netherlands. The book clarifies the reform issues and choices in
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addressed by policy makers, and brings together practical experiences and insights of experts

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and government officials from a wide range of countries and organisations.
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This book is part of the OECD’s ongoing co-operation with non-member economies around the lic

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OECD’s books, periodicals and statistical databases are now available via www.SourceOECD.org,
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histo.fm Page 1 Tuesday, December 16, 2003 1:53 PM
Reforming Public
Pensions
Sharing the Experiences of Transition
and OECD Countries
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
histo.fm Page 2 Tuesday, December 16, 2003 1:53 PM
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into
force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD)
shall promote policies designed:
– to achieve the highest sustainable economic growth and employment and a rising standard of
living in member countries, while maintaining financial stability, and thus to contribute to the
development of the world economy;
– to contribute to sound economic expansion in member as well as non-member countries in the
process of economic development; and
– to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in
accordance with international obligations.
The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France,
Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries
became members subsequently through accession at the dates indicated hereafter: Japan
(28thApril1964), Finland (28th January 1969), Australia (7thJune 1971), New Zealand (29th May 1973),
Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland
(22ndNovember 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The
Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD
Convention).
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The OECD Centre for Co-operation with Non-members (CCNM) promotes and co-ordinates OECD’s
policy dialogue and co-operation with economies outside the OECD area. The OECD currently maintains
policy co-operation with approximately 70 non-member economies.
The essence of CCNM co-operative programmes with non-members is to make the rich and varied
assets of the OECD available beyond its current membership to interested non-members. For example,
the OECD’s unique co-operative working methods that have been developed over many years; a stock of
best practices across all areas of public policy experiences among members; on-going policy dialogue
among senior representatives from capitals, reinforced by reciprocal peer pressure; and the capacity to
address interdisciplinary issues. All of this is supported by a rich historical database and strong
analytical capacity within the Secretariat. Likewise, member countries benefit from the exchange of
experience with experts and officials from non-member economies.
The CCNM’s programmes cover the major policy areas of OECD expertise that are of mutual interest
to non-members. These include: economic monitoring, statistics, structural adjustment through
sectoral policies, trade policy, international investment, financial sector reform, international
taxation, environment, agriculture, labour market, education and social policy, as well as innovation
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(cid:1)(cid:2)(cid:3)(cid:4)(cid:5)(cid:2)(cid:3)(cid:6)(cid:7)
Over recent decades there has been increasing recognition that the ageing of the population will
have significant implications for fiscal, economic and social policies world-wide. In Europe, as the
baby-boom generation reaches retirement age in the coming years, the proportion of the population in
the labour force is expected to fall. If this were to occur, there would be fewer people producing goods
and services to support the population that would include many more retired people. As a result, in the
absence of offsetting changes, public pension expenditures are projected to rise significantly. These
trends are common to virtually all European countries, including those in the OECD and non-OECD
transition countries of Central and Eastern Europe. The economies of Central and Eastern Europe have
faced additional challenges, however, arising from their transition to market economies. Many
countries of Central and Eastern Europe have reformed some of the parameters of their public pay-as-
you-go (PAYG) system. In addition, some have opted for “radical” reforms to enhance the role of
private, so-called “second-pillar” pensions. These include Hungary (from 1998), Poland (1999), Latvia
(2001) Estonia (2002) and the Russian Federation (2002). Even in those countries that have not
adopted these reforms, there has been intensive discussion of alternative approaches. Because some of
these countries are quite advanced in reforms of their retirement income arrangements, there are useful
lessons for other OECD countries as well.
Under a grant from the Ministry of Foreign Affairs of the Netherlands, the OECD’s Directorate
of Employment, Labour and Social Affairs organised a seminar on “Practical Lessons in Pension
Reform: Sharing the Experience of OECD and Transition Countries”. Additional support was also
provided under the Russia Programme of the OECD’s Centre for Co-operation with Non-Members
(CCNM). The Ministry of Labour and Social Policy of Poland hosted the meeting in Warsaw on 27
and 28 May 2002. The Ministry was supported in this by Amplico Life.
This publication includes the written papers presented at the Seminar. These papers deal with a
number of complementary themes: (cid:1)(cid:2) the political economy of pension reform; (cid:3)(cid:2) the processes of
reform and the constraints affecting policy choices; (cid:4)(cid:2) the living standards of pensioners and the
distributive impact of reforms; and (cid:5)(cid:2) practical issues in the implementation of reforms. The main
papers discuss these issues comparatively, while all four aspects are illustrated by contributions
detailing concrete country experiences in pension reform. The papers present the analyses of a very
wide range of policy makers and experts coming from eleven OECD member countries, including the
four CEE-OECD countries, and five non-member countries (Russia, Slovenia, Latvia, Lithuania and
Estonia).
This study is published on the responsibility of the Secretary-General of the OECD.

Eric Burgeat
Director
OECD’s Centre for Co-operation
with Non-Members
3
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6
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(cid:7)
(cid:7)
(cid:3)(cid:25)(cid:10)
Peter Whiteford1

Principal Administrator,
Directorate for Employment, Labour and Social Affairs, OECD
(cid:10)(cid:26)(cid:22)1(cid:27)(cid:18)(cid:19)(cid:21)(cid:16)(cid:20)(cid:7)A(cid:7)(cid:17)&(cid:25)(cid:7)(cid:18)(cid:25)(cid:26)(cid:31)(cid:19)(cid:16)(cid:31)(cid:7)(cid:28)(cid:19)(cid:18)(cid:7)!(cid:25)(cid:16)(cid:31)(cid:23)(cid:19)(cid:16)(cid:7)(cid:18)(cid:25)(cid:28)(cid:19)(cid:18)(cid:29)(cid:7)
Over recent decades, there has been increasing recognition that population ageing will have
significant implications for fiscal, economic and social policies in Europe. Demographic trends over
the past few decades have meant that the share of the working-age population has increased, but these
trends could start to reverse in five to ten years time. The baby-boom generation will reach retirement
age, and the proportion of the population in the labour force could begin to fall. The result is that there
would be fewer people producing goods and services, to support the population that includes many
more retired people (OECD, 2000). As a result, in the absence of offsetting changes, public pension
expenditures are projected to rise significantly. For the 15 countries of the European Union, pension
spending is forecast to rise from an average of 10.4% of GDP in 2000, to a peak of around 13.6% of
GDP in 2040 (EPC, 2001).2
These trends are common to virtually all European countries, including those in the OECD and in
the European Union, as well as to the OECD and non-OECD transition countries of Central and
Eastern Europe (CEE). The economies of Central and Eastern Europe have faced additional
challenges, however. Many of these countries had close to universal coverage of retirement pensions
in the 1980s. Economic transition, in particular, privatisation and enterprise restructuring, resulted in
large increases in open unemployment, and falls in employment to population ratios. One reaction to

1. Many people must be thanked for their assistance and support during this project. The financing of the
project came from a grant (Project No. QE024201) from the Ministry of Foreign Affairs of the
Netherlands. I am grateful to Monique Van Wortel, then of the Delegation of the Netherlands to the
OECD for her support, and also to Huib de Bliek of the Ministry of Foreign Affairs. Additional
support was also provided under the Russia Programme of the OECD’s Centre for Co-operation with
Non-Members (CCNM). The Ministry of Labour and Social Policy of Poland hosted the meeting in
Warsaw on 27 and 28 May 2002. The Ministry was supported in this by Amplico Life. Tibor
Parniczky helped considerably in identifying contributors. I am grateful to David Lindeman, Michael
Förster and Jean-Pierre Garson for helpful suggestions and comments. In organising the conference,
assistance was provided by Pauline Allison and Patricia Comte. The proceedings were edited by
Alexandra Heron.
2. Holzmann, Mackellar and Rutkowski (2003) argue that these projections are over-optimistic, as they
assume lower benefits and higher employment than currently.
7
this was to allow for early retirement, or for increased access to disability programmes. The increase in
the number of pensioners reduced the financial viability of public pension systems, as system
dependency ratios deteriorated. The number of contributors, and the amount of income reported, fell
because of evasion. The first five or six years of transition also saw significant declines in GDP per
capita in many countries, and widening income inequality in a number. In addition, fertility rates
declined significantly in many CEE countries, making long-term demographic projections even more
unfavourable.
As a result, the pressures for reform have been even stronger in many countries of Central and
Eastern Europe, than the European Union, and other non-European member countries of the OECD.
Table 1 provides a range of comparative indicators of features of EU and CEE pension systems. In
summary, these show that, on average, public age pension spending in the CEE countries increased,
from just under the EU average in 1990, to just over the average by 1998, but that the proportion of the
population aged 65 years and over, remains higher in the EU countries. Despite similar levels of
aggregate spending, contribution rates for retirement pensions (and, for all, social insurance
contributions) are significantly higher – 25% on average – in CEE countries. This appears to be
because the ratio of contributors to the labour force is significantly lower in CEE countries – around
75%, compared to 89%. Correspondingly, the ratio of pensioners to contributors is higher in the CEE
countries, with just over six CEE pensioners for every ten contributors, compared to just under
five pensioners per ten contributors in the EU countries. It is also worth noting that there are
considerable differences within each of these groups of countries.
Longer term projections are even more unfavourable for many of the CEE countries. In the
absence of changes to the system, and with projected increases in life expectancy, public pension
spending in Latvia, for example, was projected to increase to 16.6% of GDP by 2050. The system
dependency ratio was projected to increase by 50% in Lithuania by 2030, and by 65% in the Slovak
Republic. These developments have produced pressures for reform in all CEE countries. Although the
range of reforms adopted has differed, the underlying motivations for reform have similarities. For
example, as noted by Katharina Müller in Chapter 1 in this volume “The need for fundamental reforms
in Hungarian old-age security was widely acknowledged, as the inherited pay-as-you-go (PAYG)
system was seen as inequitable, inadequate and unsustainable”.
(cid:30)(cid:18)(cid:23)(cid:16)(cid:22)(cid:23)!)(cid:25)(cid:31)(cid:7)(cid:28)(cid:19)(cid:18)(cid:7)(cid:18)(cid:25)(cid:28)(cid:19)(cid:18)(cid:29)(cid:7)
Given these challenges, how can retirement income systems be made more sustainable, adequate
and equitable? Previous OECD work has identified a number of principles for reform (OECD, 1998;
2000). These include that public pension systems, taxation systems, and social transfers should be
reformed to remove financial incentives to early retirement, and remove financial disincentives to later
retirement. A variety of reforms are needed, to ensure that more job opportunities are available for
older workers, and that they are equipped with the necessary skill and competence to use them.
Retirement income should be provided by a mix of tax and transfer systems, advance-funded systems,
private savings, and earnings. The objective is risk-diversification,3 a better balance of burden-sharing

3. An example of an existing diversified pension system is that in the Netherlands, which is assessed in
Chapter 11 by Peter Stein in this volume. The Dutch system of retirement incomes has three pillars,
including the state pension, which guarantees every resident a basic universal pension from the age
of 65, with benefits index-linked to the average development of collective labour agreements on
wages. The second pillar consists of the occupational pensions that supplement the state pension, and
for whom the social partners, employers and employees, are primarily responsible. The last, and
comparatively the smallest pillar, are the individual personal pensions. In 2000 almost 50% of the
income of the elderly came from the basic pension, 40% from supplementary pensions, and 10% from
the third pillar.
8
between generations, and to give individuals more flexibility over retirement decisions. It is also
important that the development of advance-funded pension systems should go hand-in-hand with that
of financial market infrastructure, including the establishment of a modern, and effective, regulatory
framework.
Pension reform can be controversial, as recent protests against reform proposals in a number of
EU countries demonstrate. Advocates of pension reform themselves also differ, in relation to their
preferred pension prescriptions. Holzmann, Mackellar and Rutkowski (2003) distinguish between
“parametric” changes to social insurance systems (altering retirement ages or replacement rates, but
leaving the basic structure of the system unchanged), and “paradigmatic changes”, more radical shifts
to private and advance-funded second pillars. Holzmann, Mackellar and Rutkowski (2003, p. 9) also
point out that these more radical reforms are based on a number of policy arguments, including that
individual accounts have desirable work and compliance incentives; funding can increase a nation’s
savings and investment under the right fiscal conditions; and funded accounts can accelerate the
development of capital market institutions and efficiency in capital allocation, therefore leading to
higher growth. They also note that these assumptions are more attractive in CEE countries, where the
objective is to catch up with the EU.
Chapter 6 by Nicholas Barr argues, however, that there are a number of myths about the
effectiveness of funding of pensions, in resolving the challenges posed by demographic ageing. The
chapter argues that in the face of demographic pressures, the key variable is output. This means that
countries should consider the full menu of policies that promote output growth, and the argument that
funding insulates pensioners from demographic change should not be overstated. Nicholas Barr also
discusses the pre-requisites for successful pension reform, arguing that the starting point is that state
pension promises should be fiscally sustainable. In addition, there should be sufficient political
support for a reform programme, the state should have the administrative capacity to enforce taxes and
contributions, to maintain economic stability and to provide effective regulatory capacity. Further,
private sector pre-requisites for reform include a sufficiently well-informed population, the existence
of financial assets for funds to hold and financial markets to channel investments, and adequate private
sector capacity. The final part of Barr’s chapter turns to the range of choices facing policymakers,
drawing on the very different arrangements in different countries. The main conclusions are threefold:
the key variable is effective government. From an economic perspective, the difference between pay-
as-you-go and funding is second order. The range of potential choice over pension design is wide. One
size does not fit all.
In this context, a number of the other contributors in this volume identify a range of reasons
underlying the success, or otherwise, of the actual reform programmes implemented in CEE countries.
From a political economy perspective, radical reform proposals have had the greatest likelihood of
success, where a “bundling” strategy was pursued – most of the politically sensitive parametric
reforms were introduced simultaneously with the introduction of individual accounts. On the other
hand, concern about the fiscal costs of transition has played a role in the failure of some countries to
proceed with the introduction of funded systems, including Lithuania and Slovenia. These issues are
explored in depth in Chapter 1(cid:10)by Katharina Müller, who seeks to explain the observable pension
reform outcomes in six transition countries, as a result of the interplay of economic and political
variables. The two earliest Central European cases, Hungary and Poland, are contrasted with two more
recent cases of pension privatisation, Croatia and Bulgaria. The cases of the Czech Republic and
Slovenia are presented, where policymakers did not opt for the radical changes advocated by the “new
pension orthodoxy”. The chapter describes and explains how different pension reform choices came to
be made in these countries, by analysing the behaviour of individual and collective actors under
economic, political and institutional constraints. The cases analysed indicate that, contrary to
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