Pension Reform and Labor Market Policies In Central Europe

Elaine Fultz

Senior Specialist in Social SecurityInternational Labor Organization

Budapest

2

Older population in Europe is growing rapidly

• Over the past 50 years, average life expectancy increase from 63 to 73.

• Is expected to rise to 80 by 2050.

3

Proportion of European population 60+ years

Source: United Nations projections (2003), as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

0

5

10

15

20

25

30

35

40

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

EU 15 + Iceland, Switzerland, Norway New EU member States

South Eastern Europe and Mediterranean Commonwealth of Independent States

4

Proportion of European population 80+ years

0

2

4

6

8

10

12

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

EU 15 + Iceland, Switzerland, Norway New EU member States

South Eastern Europe and Mediterranean Commonwealth of Independent States

Source: United Nationas projections (2003), as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

5

Labor Market Participation

No commensurate increase

6

Life expectancy at age 60 and average exit age from the labor force

 

Life expectancy at 60

Average exit age (both sexes) males females

EU 15 + Norway

Belgium 19.6 23.9 58.5

Denmark 19.1 22.4 60.9

Germany 19.8 a 23.9 a 60.7

Greece 20.1 b 23.1 b 59.4 a

Spain 20.3 c 24.9 c 61.5

France 20.6 a 25.7 a 58.8

Ireland 19.2 22.9 62.4

Italy 20.4 c 24.8 c 59.9

Luxembourg 19.6 24.2 59.3

Netherlands 19.5 23.5 62.2

Austria 20.2 24.1 59.3

Portugal 19.4 23.3 62.9

Finland 19.5 24 60.5

Sweden 20.9 24.3 63.2

United Kingdom 19.4 c 23 c 62.3

Norway 20.2 24 62.5

Source: EUROSTAT database, as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

7

Life expectancy at age 60 and average exit age from the labor force

 

Life expectancy at 60

Average exit age (both sexes) males females

New EU Member States

Czech Republic 17.3 21.5 60.2

Estonia 15.4 21.3 61.6

Cyprus 19.5 d 22.7 d 61.4

Latvia 15.2 20.8 62.4 a

Lithuania 16.1 21.7 58.9 a

Hungary 16.1 20.9 59.2

Poland 17.1 22 56.9

Slovenia 18 23.1 61.5 a

Slovakia 16.4 21 57.5

SEE & Mediterranean

Bulgaria 16.1 19.7 58.6

Romania 16.1 19.7 59.8 a

Source: EUROSTAT database, as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

8

Total and older workers employment rates, 2002

0

10

20

30

40

50

60

70

80

Denmark

Netherl

ands

Sweden UK

Austria

Portug

al

Finland

Irelan

d

German

y Lux

France

Belgium Spa

in

Greece Ita

ly

Cyprus

Czech

R.

Sloven

iaEsto

niaLa

tvia

Lithu

ania

Roman

ia

Slovaki

a

Hunga

ry Malta

Poland

Bulgari

a

Turkey

EU 15

New EU 10

Total Older workers

Source: Eurostat (2004), as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

9

Pension reforms in the later 1990s

• Increase retirement age

• Privatization – “Averting the Old Age Crisis”

10

Retirement Ages – New EU States Current law Men Women

Czech Rep.

1995, 2003 increasing to 63 by 2013 by 2 months/year

Increasing to 59-63 (depending on no. of children raised) by 4 mos/yr in 2013

Estonia 1998, in force 2000

63 Increasing to 63 in 2016 by 6 months/year

Hungary 1996 increasing to 62 in 2001 by 1 year every second year

Increasing to 62 in 2009 by 1 year every second year

Latvia 1998 increasing to 62 in 2003 by 6 months/year

Increasing to 62 in 2008 by 6 months/year

Lithuania 1994, 2000 increasing to 62.5 in 2003 by 6 months/year

Increasing to 60 in 2006 by 6 months/year

Poland 1998

(in force, 1999)

65, with early retirement eliminated beginning in 2007

60, with early retirement eliminated beginning in 2007

Slovak Rep.

2003 Gradual rise to age 62 Same as for men

Slovenia 1999 63 61

11

Mixed labor market response

• Due to –– Early retirement options– Difficult labor market situation– Social/cultural factors

12

Pension privatization in the new EU member states

Countries with mandatory, commercially managed individual savings accounts

Countries without such scheme

Hungary (1998) Czech Republic

Poland (1999) Lithuania

Latvia (2001) Slovenia

Estonia (2002)

Slovak Repub. (2003)

13

Early difficulties with privatization

• Small and undeveloped financial markets – the resulting high investment in government bonds

prevents risk diversification

• High administrative costs – negative real returns on worker savings

• Transitional financing costs– weakened the capacity of pension systems to meet

new demands from demographic aging

14

Transitional financing costs - Poland -

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

year

% GDP

privatization revenues credit public pillar savings

Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe, Vol. 1, ILO: Budapest, 2002.

15

More recent perspective on how to deal with aging:

(1) Raise employment rates– EU target: 70 percent for 2010

• 60 percent for women• 50 percent for older workers

16

Employment rates in 2002

0

1020

3040

5060

70

Esto

nia

Latvi

a

Hung

ary

Polan

d

Bulg

aria

Kaza

khsta

n

Croa

tia

Mac

edon

ia

Employment rate(15-64) Employment rate (55-64)

EU average (15-64)

EU average (55-64)

Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.

17

2. Extend working life

• European Council (Barcelona) set target for progressive increase of about 5 years by 2010.– Must take account of needs and rights of

older people, especially those with poor working conditions, long working lives, and health problems.

18

3. Pension reforms

• Needed to complement effort to increase employment

• Eliminate or reduce incentives for early retirement• Incentives to save more for own retirement• Options for gradual retirement

– Other– Address large, sustained transitional deficits from

privatization– Reestablish minimum benefits

19

In Conclusion

• Challenges ahead are great

• No recipes or standard solutions

• Multidisciplinary approach required