effects of population ageing on the pension system in...
TRANSCRIPT
EffectsofPopulationAgeingonthePension
SysteminBelarus
KaterinaLisenkova*andKaterynaBornukova+
December2015
Abstract: Belarus currently has a relatively generous pay-as-you-go pension
system,butpopulationagingcoupledwithrecentproblemswitheconomicgrowth
will soon make it unsustainable. We build a rich OLG model of Belarusian
economy, which shows that without reform the Pension Fund will run into
persistent and growingdeficit,whichwill reach 9 per cent ofGDPby 2055.We
also compute the fiscal projections of several parametric pension reforms. To
avoid a deficit without reform, pension benefitswould have to be substantially
reduced. The increase of retirement age to 65 for both genders has a strong
positiveeffectonsustainabilityofthepensionsystemandkeepsthedeficitbelow
2percentofGDP.
JELcodes:C68,H55,J26
Keywords:Belarus,pensionsystem,demography,retirementage,pensionreform
BEROCWorkingPaperSeries,WPno.28
*SeniorResearchFellowattheNationalInstituteofEconomicandSocialResearch(NIESR)in
London,[email protected]
+Research Fellow, Belarusian Economic Research and Outreach Center (BEROC) in Minsk,
1.Introduction
After the dissolution of the USSR, the majority of former Soviet Union states
experienced increases inmortality (Ellman,1994;BrainerdandCutler,2005)and
sharpdropsinbirthrates(Adsera,2004;Perelli-Harris,2008).Belaruswasnotan
exception,although the increase inmortalitywas lesspronounced than inother
newly independent states, as the socio-economic changes were less drastic
(Grigorievetal.,2010;Shakhotska,2007).Thehealthcrisisofthe90scontributed
tothedecline inthelifeexpectancy,especiallyamongmales(Cockerham,1997).
In1999themalelifeexpectancyatbirthwasonly62.2years(WDI,WorldBank),
thelowestforthepast50years.
In 2000s, economic growth in Belarus picked up. It was pro-poor (Haiduk and
Chubrik, 2007), and living standards improved rapidly. As economic uncertainty
subdued and incomes grew, both life expectancy and fertility increased. The
government also introduced maternity and child benefits, and these policies
contributedtoan increase in fertility (Amialchuketal.,2011).But thesepositive
developments were not enough to reverse the negative trend in population
growth.AccordingtotheWorldBank, theBelarusianpopulationdecreasedfrom
10.2millionin1991to9.5millionpeoplein2014.AccordingtotheUNpopulation
projections it is expected to contract to 8.1 million people by 2050. More
importantly for the pension system, the old-age dependency ratio (number of
personsofretirementageper100workers)willalmostdoublefrom43in2015to
82in2050(seeFigure1).
The current pension system in Belarus is a standard one-pillar pay-as-you-go
scheme. The retirement ages inBelarus are among the lowest in the region: 55
years for femalesand60formales.Thecontributionrateof29percent,onthe
otherhand,isamongthehighestinEasternEurope(ZvinieneandBiletsky,2011).
In2013 theaveragepensionbenefitexceeded thepoverty level2.54 times,and
constituted38percentofanaveragewage(Belstat,2014).
Lowpost-warbirthratesimpliedthatinthe2000sthecohortsenteringretirement
were relatively small. This favourable demographic environment allowed for a
surplusinthePensionFund.Asold-agedependencyworsened,2013becamethe
firstyearwithregisteredPensionFunddeficit.UNpopulationprojectionssuggest
that age dependencywill continueworsening until 2050when it stabilizes, and
PensionFunddeficitsmightbecomeunsustainable.
Figure1.Old-agedependencyratio
Source:2010-basedUNpopulationprojections(mediumscenario)
Manydevelopedcountriesfacesimilarchallengesastheirpopulationsareageing.
A growing body of literature is analysing public pension systems with general
equilibrium overlapping generation (OLG) models. De Nardi, Imrohoroglu, and
Sargent (1999), for instance, study social security reform in the U.S. economy;
Diaz-GimenezandDiaz-Saavedrastudytheeffectsofanincreaseinretirementage
inSpain(2009).
Zviniene and Biletsky (2011) build fiscal projections for the pension system of
Belarus using the World Bank PROST accounting model. To the best of our
knowledge,thispaperisthefirstattempttomodeltheBelarusianpensionsystem
inanOLGframework,taking intoaccountgeneralequilibriumeffectsofpossible
reformsandmacroeconomicconsequencesofdecreasingworking-agepopulation.
Wefindthatunderthecurrentarrangementsofthepublicpensionschemewith
thecurrentreplacementrate(averagepensionsataround40percentofaverage
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110
wage)thePensionFunddeficitsincreaseuptotheyear2050.Wealsoshowthatit
will be necessary to either decrease the replacement rate or increase
contributions tokeep thePensionFundafloat.Delaying retirement, inparticular
forwomen, is anotheroption,whichnotonly improves the sustainabilityof the
PensionFund,butalsobenefitsGDPgrowthbyincreasingthelaboursupply.
Therestofthepaperisstructuredasfollows.InSection2wegiveanoverviewof
the pension system in Belarus. In Section 3 we briefly describe the model. In
Section4wedescribethecalibrationofthemodeltoBelarusianmacroandmicro
data.SimulationresultsandpossiblereformprojectionsaredescribedinSection5.
Section6concludes.
2.ThePensionsysteminBelarustoday
Thecurrentpensionsystem inBelaruswas inherited fromtheSovietUnion.The
pensionsystemisredistributiveorpay-as-you-go(currentgenerationsofworkers
pay contributions, which are used in the same period to pay pensions to the
currentretirees).
Thepensionageis60yearsformenand55yearsforwomen.Thesearethelowest
pension ages in Europe (see Table 1 for details), comparable only to those in
Russia(Ukrainehasalreadystartedraisingthepensionageforwomen).Theonly
reformsof thepension systemduring the years of the independence in Belarus
were the restrictions of access towork pensions , which are now paid only for
thosewhocontributedtothePensionFundforatleast15years(stillverylow).If
the person does not meet this criteria, she/he is only entitled to the social
pension, paid after the age 65 formen and 60 forwomen. Asmost developed
countries have moved towards the same pension ages for both sexes, Belarus
remainsamongthegroupoftransitioncountrieswhichstillclingtotheoutdated
policyofearlierretirementagesforwomen.
Thesocial securitycontributionsarepaid to theFundof theSocialProtectionof
the Population (here the Pension Fund). Total pension contributions are 29 per
cent of grosswages, ofwhich only 1 per cent is paid directly by the employee,
whiletheemployerpaystherest.
In2013, the totalamountofpensionspaidoutby thePensionFundconstituted
9.4 per cent of GDP. This level of expenditure is similar tomany European and
transition countries. 2013was also the first year of the Pension Fund deficit in
Belarus–thedeficitwasquitesmall,amountingto0.08percentofGDP.
Table1.Statutoryretirementagesacrosscountries
Transition countries Developed countries
Armenia 63 Australia 67 Azerbaijan 58/63 Austria 65 Belarus 55/60 Belgium 65 Bulgaria 60/63 Canada 65 Croatia 60/65 Denmark 67 Czech Republic 55-61/62.5 Finland 65 Estonia 60.5/63 France 65 Georgia 60/65 Germany 67 Hungary 62 Greece 65 Kazakhstan 58/63 Iceland 67 Kyrgyz Republic 58/63 Ireland 65/66 Latvia 62 Israel 67 Lithuania 60/62.5 Italy 60/65 Moldova 57/62 Japan 65 Poland 60/65 Netherlands 65 Romania 59/64 New Zealand 65 Russian Federation 55/60 Norway 67 Serbia 60/65 Portugal 65 Slovak Republic 59.5/62 Spain 65 Slovenia 56.3/63 Sweden 65 Turkmenistan 57/62 Switzerland 64/65 Ukraine 55-60/60 United Kingdom 68 Uzbekistan 55/60 United States 67 Source:Pallares-Mirallesetal.,2012
The replacement rate (the ratio of the average pension to average wage) in
Belarus is not high compared toOECD countries. TheOECD average is 54.5 per
cent, while the Belarusian replacement rate was only 43 per cent in 2013. The
averagepensioninBelarusin2013was2.21mlnBelarusianroubles,or249USD.
Given the demographic challenges ahead, Belarus needs to reform its pension
system. These changes can be parametric – changing only the features of the
current pay-as-you-go system – or structural. In this paper we focus on the
sustainabilityofthecurrentsystemandthepossibleparametricreforms.
3.TheModel
The model used in this paper is designed to analyse the long-term economic
implications of demographic change. The exogenous demographic process is
superimposedon themodel andprovides the shockor driving forcebehind the
simulation results. The model is calibrated on the Belarusian data. Below we
describethedemographicstructureofthemodelandoutlinethemainfeaturesof
theproduction,householdandgovernmentsectors.
3.1DemographicStructure
Thepopulationisdividedinto21generationsoragegroups(i.e.,0-4,5-9,10-14,
15-19,…, 100-104).Demographic variables, fertility,mortality andnet-migration
ratesareassumedtobeexogenous.Everycohortisdescribedbytwoindices.The
firstist,whichdenotestime.Thesecondisg,whichdenotesaspecificgeneration
oragegroup.
Thesizeofthecohortbelongingtogenerationg+kinanyperiodtisgivenbythe
followingtwolawsofmotion:
( ) [ ]⎪⎩
⎪⎨
⎧
∈+
==
−+−−+−−+−
−++−
+
20,1
0
1,11,11,1
15,1,
kformrsrPop
kforfrPopPop
kgtkgtkgt
tkgtkgt (1)
Thefirstequationsimplyimpliesthatthenumberofchildrenbornattimet (age
groupg+k=g, i.e.agegroup0-4)isequaltothesizeofthefirstadultagegroup
(g+k+5=g+5,i.e.agegroup20-24)attimet-1multipliedbythe“fertilityrate”,fr,in
that period. If every couple has two children on average, the fertility rate is
approximately equal to 1 and the sizeof the youngest generationg at time t is
approximatelyequaltothesizeofthefirstadultgenerationg+5oneyearbefore.
Aperiodinthemodelcorrespondstofiveyearsandaunitincrementintheindex
k representsboth thenextperiod, t+k, and, for an individual, anda shift to the
nextagegroup,g+k.
Thesecondlawofmotiongivesthesizeattimetofanyagegroup,g+k,beyond
thefirstgeneration,asthesizeofthisgenerationayearagotimesthesumofthe
agespecificconditionalsurvivalrate,sr,andthenetmigrationrate,mr,attimet-
1. In this model the fertility rates vary across time, while the survival and net
migration rates vary across time and age. For the final generation (i.e., the age
group 100-104 (k=20)), the conditional survival rate is zero. This means that
everyonebelongingtotheoldestagegroupinanyperioddieswithcertaintyatthe
endoftheperiod.
Timevariablefertilityandtime/age-variablenetmigrationandconditionalsurvival
rates are calibrated based on exogenous population projections. This permits a
precisemodelling of the demographic scenarios of any configurationwithin the
model.
3.2Production
At any time t, a representative firm hires labour and rents physical capital to
produceasinglegoodusingaCobb-Douglastechnology.Theproductionfunction
thusreads:
αα −= 1ttt LAKY (2)
whereYdenotesoutput,Kisphysicalcapital,Ldenoteseffectiveunitsoflabour,A
is a scaling factor andα represents the share of physical capital in output. The
market in which the representative firm operates is assumed to be perfectly
competitive. Factor demands thus follow from the solution to the profit
maximizationproblem:
1−
⎟⎟⎠
⎞⎜⎜⎝
⎛=
α
αt
tt L
KAre (3)
α
α ⎟⎟⎠
⎞⎜⎜⎝
⎛−=
t
tt L
KAw )1( (4)
where re andw denote, respectively, the rental rate of capital and the wage
rate.
3.3Householdsector
Householdbehaviouriscapturedby21representativehouseholdsthatinteractin
an Allais-Samuelson overlapping generations structure representing each of the
agegroups.Individualsenterthelabourmarketattheageof20,retireattheage
of65,anddieatthe latestbytheageof104.Youngergenerations(i.e.0-4,5-9,
10-14and15-19)are fullydependentontheirparentsandplaynoactiverole in
the model. However, they do influence the public expenditure. An exogenous
age/time-variablesurvivalratedetermineslifeexpectancy.
Adult generations (i.e. age groups 20-24, 25-29, …, 100-104) optimise their
consumption-saving patterns over time. The household’s optimization problem
consistsofchoosingaprofileofconsumptionoverthelifecyclethatmaximizesa
CEStypeinter-temporalutilityfunction,subjecttothelifetimebudgetconstraint.
Theinter-temporalpreferencesofanindividualbornattimetaregivenby:
( )∑ =
−++++=
+=
⎪⎭
⎪⎬⎫
⎪⎩
⎪⎨⎧
Π⎥⎥⎦
⎤
⎢⎢⎣
⎡
+Π
−=
20
41
,,04 )(11
11
k kgktmgmtkm
lg
kl CsrU θ
ρθ (5)
whereCdenotesconsumptionand𝜃 representstheinverseoftheconstantinter-
temporal elasticity of substitution. Parameter 𝜌 is the pure rate of time
preference, and is age-variable. Future consumption is also discounted at the
unconditionalsurvivalrate, 𝑠𝑟!!!,!!!! ,whichistheprobabilityofsurvivalupto
theageg+kandperiodt+k.It istheproductoftheage/time-variableconditional
survivalrate,srt+k,g+k,betweenperiodst+kandt+k+1andagesg+kandg+k+1.
The household is not altruistic, i.e. it does not leave intentional bequests to
children. It insures its future via a perfect annuity market, as described
theoretically by Yaari (1965, case C) and implemented in an OLG context by
Borsch-Supanetal(2006).
Thehousehold’sdynamicbudgetconstrainttakesthefollowingform:
( ) [ ]( ) [ ][ ]gtCgt
Ktgtt
Lt
Lgt
gtgt
CHArPensCtrY
srHA
,,,,
.1,1
1111
1
τττ +−−+++−−
×=++ (6)
whereHAisthelevelofhouseholdassets,ristherateofreturnonphysicalassets,
τK is the effective tax rate on capital, τL the effective tax rate on labour, τC the
effective tax rate on consumption, Ctr is the contribution rate to the public
pensionsystem,YListhelabourincome,Pensisthelevelofpensionbenefits.
The intuition behind the term 1/sr is that the assets of those who die during
period t are distributed equally between their surviving peers. Therefore, if the
survivalrateattimetinagegroupgislessthanone,thenattimet+1everyonein
their grouphasmoreassets. This is themathematicaldescriptionof theperfect
annuitymarket.
Labourincomeisdefinedas:
ggtLgt LSEPwY =, (7)
where LS is the exogenously given supply of labour. It is assumed that labour
incomedependsontheindividual’sage-specificproductivity.Inturn,itisassumed
that these age-specific productivity differences are captured in age-earnings
profiles.Theseproductivityprofilesarequadraticfunctionsofage:
2)()( ggEP t ψλγ −+= , γ,λ,ψ≥0 (8)
withparametricvaluesestimatedfrommicro-data(asdiscussedinthecalibration
section). Differentiating the household utility function, subject to its lifetime
budget constraint, with respect to consumption yields the following first-order
conditionforconsumption,commonlyknownasEulerequation:
[ ][ ]gt
t
tK
gt Cr
C ,
1
11,1 )1(
11 θ
ρ
τ
⎥⎥⎦
⎤
⎢⎢⎣
⎡
+
−+= +
++ (9)
It is important to note that, since survival probabilities are present in both the
utilityfunctionandthebudgetconstraint,theycanceleachotheroutandarenot
presentintheEulerequation.
3.4InvestmentandAssetReturns
Thelawofmotionforthecapitalstock,Kstock,is:
ttt KstockInvKstock )1(1 δ−+=+ (10)
whereInvrepresentsinvestment,δisthedepreciationrateofcapital.
Capital markets are assumed to be fully integrated. This implies that financial
capital is undifferentiated from physical capital, so that the interest rate parity
holds:
)1(1 δ−+=+ tt rer (11)
where r and re denote the net and gross rates of return to physical capital,
respectively.
3.5GovernmentSector
TheGovernment’sbudgetconstraintreads:
( ){ }
∑
∑
+=
+++
ggtgtt
ggtt
Kgt
Cgtgttt
Ltgt
PensPopGov
HArCLSEPwCtrPop
,,
,,,,, τττ
(12)
whereGov is public consumption. The left-hand sideof the constraint contains
thegovernment revenues.Theright-handsiderepresentsdifferentcategoriesof
governmentexpenditure includingtransfers tohouseholdsandpensionbenefits.
Notethatthepensionprogramisapartoftheoverallgovernmentbudget.
Public expenditures per person, GEPC, are fixed per-person and hence total
expenditure,Gov,dependsonlyonthesizeofthetotalpopulation,TPop.
GEPCTPopGov tt = (13)
In the simulations presented in this paperweuse thewage tax rate, Ltτ , as the
onlyendogenouspolicyvariablethatadjustsineveryperiodtoachieveabalanced
governmentbudget.Wagetaxdoesnotgenerateefficiencydistortions,giventhe
absenceofanendogenouslabour-leisuredecision.
3.6MarketandAggregationEquilibriumConditions
Perfect competition is assumed in allmarkets. The equilibrium condition in the
goodsmarketrequiresthattheBelarus'outputbeequaltoaggregateabsorption,
which is the sum of aggregate consumption, investment and government
spending:
ttttg
gtgtt GovEGovHGovInvCPopY ++++=∑ ,, (14)
Labour market clearing requires that the demand for labour be equal to the
supply:
∑=g
gggtt EPLSPopL , (15)
Similarly,theunitsofcapitalaccumulateduptoperiodtmustequaltheunitsof
capitaldemandedbytherepresentativefirminthatperiod:
tt KKstock = (16)
Inthesamevein,equilibriuminthefinancialmarketrequirestotalstockofprivate
wealthaccumulatedat theendofperiod t tobeequal to thevalueof the total
stockofcapitalaccumulatedattheendofperiodt:
tg
gtg KstockHAPop∑ =, (17)
4.Calibration
Themodeliscalibratedusing2013dataforBelaruswhereavailable.Thedatafor
thedemographicbaselineshockistakenfromthe2010-basedmediumpopulation
projections produced by the United Nations Population Division (UNPD).
Population projections are used for the calibration of the fertility and survival
ratesusedinthemodel.
The data on public finances and GDP components are taken from the National
Accounts. The effective labour income, capital and consumption tax rates are
calculatedfromthecorrespondinggovernmentrevenuecategoriesandcalibrated
tax bases. Data on total amount of pensions are taken from the Pension Fund
budget.Basedonthisinformation,theeffectivepensioncontributionrateandthe
average size of pension benefits can be calculated. The average pension per
person isobtainedbydividing the totalamountofpensionbenefitsby the total
number of people of pension age. In a baseline scenario, males start receiving
pensionbenefitsattheageof60andfemalesattheageof55.
ThesourceofthelabourmarketdataistheBelarusianHouseholdBudgetSurvey
2013 (BHBS). Two labourmarket characteristics arederived from thedata: age-
specific employment rates and age-specific productivity profiles. The latter are
estimatedviatheuseofquadraticage-earningregressions.
Figure2.Employmentratesbyageandsex
Figure2showsemploymentratesbyageandsex.Employmentisveryhigh–inthe
region of 90 per cent – until the pension age, at which point it plummets. As
expectedfemaleemploymentratesbegintofall5yearsearlierthanmalebecause
oflowerstatepensionage.
Inthebaselinescenarioweassumethatthereistotalfactorproductivitygrowthof
1.5percentperyearforthenext100years.The(5-year)inter-temporalelasticity
of substitution is set to 1.25. The wage rate is a numerare. Other model
parametersarecalibrated.
Thecalibrationprocedureisasequenceofthreesteps.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-80
male female
In the first step using the information on GDP, capital and labour earnings we
calculatethescalingparameterintheproductionfunctionandthecapitalincome
share.
Thesecondstepisthemostchallengingonesinceitinvolvesequationsdescribing
the household’s optimisation problem, the equilibrium conditions in the assets
andgoodsmarketsandthegovernmentbudgetconstraint.Inparticular,therate
of time preference is solved endogenously during the calibration procedure in
order togenerateplausibleconsumptionandcapitalownershipprofiles foreach
agegroup.Capitalownershipprofilesmustalsosatisfy theequilibriumcondition
ontheassetmarket.
Thethirdandfinalstepusesthecalibrationresultsofthefirstthreestepstoverify
thatthemodel isabletoreplicatetheobserveddatacorrespondingtotheinitial
equilibrium. Only when the initial equilibrium is perfectly replicated by the
calibration solution can the model be used to evaluate the consequences of
exogenousshocks/policyexperiments.
5.Simulationsandresults
Inallscenariospresentedbelow,populationprojectionsprovidethemainshockto
themodel.Inadditionwemakeassumptionsaboutthepaceofeconomicgrowth
andtheconfigurationofthepensionsystem.
Pay-as-you-go pension systems can be described by three broadly defined
characteristics:levelofcontributions,levelofbenefitsandnumberofretired.Our
model inevitably has to simplify many complexities of the Belarusian pension
system. We use three parameters as proxies for the above mentioned
characteristicsofthepensionsystem:contributionrate,replacementrate(ratioof
averagepension toaveragewage)and statepensionage.Byadjusting themwe
can seewhat effect thiswill haveon the future stability of thepension system.
Sincethecurrentcontributionrateat29percentoflabourincomeisalreadyone
ofthehighestintheworld,wedonotconsideranyscenariosthatrequireafurther
increase.
5.1.Baselinescenario
For the baseline scenario, we use the UN medium population projections for
Belarus for 2010-2110. After 2110 population size and age-sex structure are
assumedtostayconstant.Weassumetotalfactorproductivity(TFP)growthof1.5
percentperyearoverthenext100yearsand0percentthereafter.Pensionage
for females/males stays at 55/60 years. This can be thought of as a status quo
scenario,aswedonotchangethecurrentparametersofthepensionsystem.
Due to assumed technological progress, in the baseline scenarioGDP in Belarus
increases almost 2 times over the next 50 years. To illustrate the effect of
populationageing,Figure3showsGDP,GDPperpersonandinputsofproduction
relativetothescenariowiththesameTFPgrowthbutwithoutageing.Duetothe
changesinagestructureby2060,GDP,labourandcapitalsupplydeclineby41,43
and37percentcorrespondingly.GDPperpersonduringthesameperioddeclines
by16percentandstabilisesafterthat.
Figure3.GDPandinputsofproduction,relativetoscenariowithoutageing
Projecting the level of pension benefits into the future requiresmaking certain
assumptions. Pension benefits are usually indexed to take into account
-16%
-43%-41%-37%
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
GDPperperson Laboursupply
GDP Capitalsupply
improvements in standardsof living. Indexation rulescanbeveryelaborate,but
two that are often used are indexation towages orGDP growth. They produce
drasticallydifferentoutcomesintermsofsustainabilityofthepensionsystemand
livingstandardsoftheretired.Figure4illustratesthedifferencebetweenthetwo
typesofindexationbyshowingtheamountoftotalpensionbenefitsasashareof
GDP. In2013 totalpensionbenefitsamounted to9percentofGDP. Ifpensions
areindexedtowages,thenby2050thetotalpensionbillwouldreach18percent
ofGDP.But ifpensionsare indexed toGDP, theywould increase toonly12per
centofGDP.
Figure4.TotalpensionsasashareofGDP
If contributions are not increased in line with the pension bill, this leads to a
corresponding deficit in the Pension Fund (Figure 5). If pension benefits are
indexedtowages,by2050thedeficitreaches9percentofGDP.If,ontheother
hand,pensionsareindexedtoGDP,deficitpeaksat3percentofGDPin2050and
bytheendofthecenturyalmostdisappears.
16%
9%9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
Indexationtowages
IndexationtoGDP
Figure5.PensionFunddeficit
Figure6.Replacementrate
7%
0.3%0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
Indexationtowages
IndexationtoGDP
41%
24%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
Indexationtowages
IndexationtoGDP
Different indexation rules have consequences not only for the financing of the
pensionsystem,butalsofortherelativelivingstandardsfortheretired.Figure6
showschangesinreplacementrate–ratioofaveragepensiontoaveragewage–
under different indexation rules. If pensions are indexed towages it essentially
means that replacement rate stays constant. If they are indexed to the growth
rateofGDP,however,thismeansthatrelativelivingstandardsofpensionersare
deteriorating– replacement ratedecreases from43per cent in2013, to just28
percentin2050.
5.2.Increaseinthestatepensionage
The previous section demonstrated that the status quo will result in a large
PensionFunddeficit.Thiscanbemitigatedbyusingdifferentindexationrules,but
at a costof a significant reduction in the living standardsof the retirees. In this
sectionwewill explore the effect of another policy option – an increase in the
statepensionage.CurrentlyBelarushasoneof the loweststatepensionages in
theworld–55years for femalesand60 formales.We lookat twoscenariosof
statepensionage increase.The firstone is increaseof femalestatepensionage
from55to60by2025(byhalfayeareveryyear).Thesecondscenarioisincrease
inthestatepensionageforbothsexesto65by2035.
Figure7demonstrates theeffectof thesechangesonold-agedependencyratio.
Thedependencyratiochangesinthecaseofanincreaseinthestatepensionage
for two reasons: the number of working people increases, and the number of
pensionersdecreasesduetolaterretirement.
Withfallingdependencyratio,fundingthepensionsystembecomesmucheasier.
Figure8showsthesizeofthePensionFunddeficit.Ifpensionageisnotincreased,
by 2055 the deficit reaches 9 per cent of GDP. If pension age for women is
increased to60years, thedeficit in2055decreases to7per centofGDP. If the
statepensionageforbothsexesisincreasedto65years,thedeficitatitspeakin
2060isonly3percentofGDPandlaterconvergesto2percentofGDP.
Figure7.Old-agedependencyratio
Figure8.PensionFunddeficit,%ofGDP
0.7
0.6
0.4
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110
55/60
60/60
65/65
7%
6%
2%
-2%
0%
2%
4%
6%
8%
10%
12%
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
55/60
60/60
65/65
6.ConcludingRemarks
Theprocessofpopulationageingpresentsaseriouschallengefor theBelarusian
economy. Our estimates suggest that it will result in a 16 per cent drop from
potential per capitaGDPby 2050. But oneof themost urgent consequences of
populationageingisthepersistentdeficitinthepensionsystem.
The Pension Fund has ran into deficit in 2013 for the first time, but our results
suggestthatdeficitswillgrowinthefuture,andunderthecurrentpensionsystem
willreach9percentofGDPannuallyby2055.Weestimatethepossibleeffectsof
two parametric reforms: decreases in replacement rate and increases in
retirementage.
Wefindthatretirementageincreasewouldbeveryeffective,asitworksnotonly
through thedecrease inpensionpayments,butalso increases the labour supply
andGDP. If retirementage forbothmalesand females is increased to65years,
the Pension Fund deficitwill not exceed 3 per cent of GDP. Increasing only the
femaleretirementageto60willkeepthedeficitbelow7percentofGDP.
Wedidnotlookatthescenariosthatinvolveanincreaseinpensioncontribution
rate,because it isalreadyoneof thehighest intheworld.Withoutasubstantial
increaseinretirementagesoranincreaseincontributions,thereplacementrate
willhavetodecrease.Thiswillresultin34percentreductioninthelivingstands
ofretireesrelativetoworkersby2055.
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