Public Pension Systems

in Advanced Asia Pacific

Challenges and Reform Options

Sanjeev Gupta

Fiscal Affairs Department

International Monetary Fund January 2013

This presentation represents the views of the author and should not be attributed to the IMF, its Executive Board, or its management.

2

Plan of Presentation

I. Pension Challenges

II. Reform Options

III. Risks to Reform Options

IV. Conclusions

0

25

50

75

100

0

10

20

30

40

1990 2000 2010 2020 2030 2040 2050

Note: Japan right hand axis

3

I. Pension Challenges

Working-age population

0

75

150

225

300

0

15

30

45

60

1990 2000 2010 2020 2030 2040 2050

Note: United States right hand axis

Korea

Japan

Australia

New Zealand

Singapore

Germany

United States

Canada

Italy

France

United Kingdom

Population aged 15-64

(in millions)

Source: UN.

4

I. Pension Challenges

Old-age dependency ratio

0

10

20

30

40

50

60

70

80

1990 2000 2010 2020 2030 2040 2050

0

10

20

30

40

50

60

70

1990 2000 2010 2020 2030 2040 2050

Japan

Korea

New Zealand

Australia

Singapore

Italy

Germany

France

United States

Canada

United Kingdom

Population 65 and older as a share of population aged 15-64

Source: UN.

5

I. Pension Challenges

Life expectancy trends

Life expectancy trends, gender and socio-economic

status

Life expectancy higher for females than males

Widening gap in life expectancy between lowest and

highest socioeconomic groups

20

25

30

35

2010 2020 2030 2040 2050

Australia female Australia male

20

25

30

35

2010 2020 2030 2040 2050

Japan female Japan male

Source: UN.

6

I. Pension Challenges

Increases in Public Pension Spending

0

2

4

6

8

10

12

14

2010 2020 2030 2040 2050

0

2

4

6

8

10

12

14

16

18

2010 2020 2030 2040 2050

Korea

Australia

New Zealand

Japan

Canada

United Kingdom

Italy

Germany

France

United States

Pension spending, 2010-50

(in percent of GDP)

Sources: OECD, EC, ILO, and IMF staff estimates.

Assets in pension funds, 2009

(in percent of GDP)

7

I. Pension Challenges

Different Approaches

0

10

20

30

40

50

60

70

80

90

Australia Japan Korea New Zealand

Canada France Germany Italy United Kingdom

United States

Source: OECD.

8

I. Pension Challenges

Gender and Inter-/Intra Generational Equity

Fairness of the public pension system across

Genders within a generation. What is effect of labor

market (non-) participation on accrual of entitlements?

For example, do females accrue entitlements while

providing care at home, e.g. for their children or elderly

relatives? Singles versus married couples?

Income groups within a generation

Public and private sectors within a generation. Public

Service Pensions can be substantially more generous

than state pensions

Generations. Does public pension system favor particular

generations financially in terms of benefits paid relative to

contributions made?

9

II. Reform Options

Raise Retirement Age

Reduce Replacement Rates

Increase Payroll Contributions or other Revenue

In practice use a combination of the above

10

II. Reform Options

Raise Retirement Age

Measures

Increase Statutory Retirement Age with rising life expectancy

Reduce Early Retirement Incentives with the aim to raise

Effective Retirement Age

Tighten Eligibility, e.g. raise minimum contribution years

Attractive Option

No Need to Reduce Benefit Generosity

Short- and Long-Term Positive Effect on Output

Equity Issues

Same Retirement Age for all Socio-Economic Groups could

Raise Equity Issues. Increase Contribution Years instead?

Protect those who cannot work longer

11

II. Reform Options

Raise Retirement Age

Sources: OECD, SSA.

Statutory retirement ages and life expectancy

2010 2030 2050

Projected increase in

life expectancy at 65

during 2010 and 2050

2010 2030 2050

Projected increase in

life expectancy at 65

during 2010 and 2050

Australia 65 66 67 3.4 62 66 67 3.3

Japan 64 65 65 3.2 62 65 65 3.7

Korea 60 62 65 3.2 60 62 65 3.4

New Zealand 65 65 65 3.4 65 65 65 3.4

Canada 65 65 65 2.8 65 65 65 3.2

France 60.5 62 62 3.1 60.5 62 62 3.0

Germany 65 65 65 3.6 65 65 65 3.4

Italy 59 66 68 3.0 59 66 68 3.4

United Kingdom 65 66 68 3.1 60 66 68 3.5

United States 66 67 67 3.0 66 67 67 3.4

Male Female

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II. Reform Options

Reduce Replacement Rates

Measures

Indexation to inflation rather than earnings

Move from final salary to career average to calculate pension

entitlement

Macroeconomic Indexation (Japan) or sustainability factor

(Germany, Sweden), which change benefits according to ratio

of beneficiaries and contributors

Equity Issues

Complementary Reforms to Private Pensions to Ensure

Adequacy

Need to Prevent Pension Poverty

0

10

20

30

40

50

60

Australia Japan Korea New Zealand

Canada France Germany Italy United Kingdom

United States

RR in 2010 RR to stabilize spending in 2050 RR projected 2050

13

II. Reform Options

Reduce Replacement Rates

Source: IMF staff estimates.

14

II. Reform Options

Increase Payroll Contributions and Taxes

0

5

10

15

20

25

30

35

40

45

50

Japan Korea Canada France Germany Italy United Kingdom

United States

2010 Payroll tax rate Required 2050 Payroll tax rate

Sources: OECD, IMF staff estimates.

15

II. Reform Options

Combination of Measures

0

2

4

6

8

10

12

14

16

0 0.5 1 1.5 2 2.5 3

Re

du

ctio

n in

be

ne

fits

(in

pe

rce

nt)

Increase in retirement age (in years)

3.4

2.5

1.7

0.8

0.0

Increase in payroll taxes(in percentage points)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

16

III. Risks to Reform Options

Reforms insufficient

For example, aging more pronounced than predicted

Would require further reforms

Pension strategy does not deliver desired outcomes

Shift to private pensions leaves government exposed to

contingent liabilities

17

III. Risks to Reform Options

Lack of Implementation

Governments shy away from implementing unpopular

policies or introduce new policies to offset impact of original

policy, thus negating previous initiatives

Examples: Japan’s Macroeconomic Indexing not fully

implemented or Germany’s decision to modify indexation

rules to prevent pensions from falling in nominal terms

during economic crisis

Reform Reversal

Authorities could undo legislation enacted by previous

governments and change pension strategy, e.g. closure of

funded pensions in central and emerging Europe

18

IV. Conclusions

Achieving sustainable public finances major

challenge given pressure of demographic change on

public pension and healthcare spending

Regardless of current arrangements (e.g. funded,

unfunded, role of private pensions), no country

immune from challenges

Past reforms welcome but lack of implementation or

policy reversals pose genuine risks

Future reforms need to factor in equity issues

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Thank you!