The European Dimension of Public and Private Pensions

Prof. Axel Börsch-Supan, Ph.D.Munich Center for the Economics of Aging (MEA) at the Max-Planck-Institute for Social Law and Social Policy

BAVC, Prague, 04 June 2012

MAX PLANCK INSTITUTE FOR SOCIAL LAW AND SOCIAL POLICY

2

Outline

1. Introduction: Pensions and the role of the Whitebook on pensions

2. Structural differences in European pension systems

3. Common problems and causes for reform in Europe

4. Cures and policy responses in Europe 5. Specific role of occupational pensions in Germany6. Conclusions

Pension expenditures (% GDP)

MAX-PLANCK-INSTITUT FÜR SOZIALRECHT UND SOZIALPOLITIK

The EU Whitebook on Pensions

0

5

10

15

20

25

30

2007 2010 2015 2020 2025 2030 2035 2040 2045 2050

Austria

Belgium

Canada

CzechRepublic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Luxembourg

Netherlands

Norw ay

Poland

Portugal

SlovakRepublic

Slovenia

Spain

Sw eden

Sw itzerland

UnitedKingdom

UnitedStates

EU27

Pension Expenditures (% GDP)

MAX-PLANCK-INSTITUT FÜR SOZIALRECHT UND SOZIALPOLITIK

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explizit vs implicit debt [%GDP]

MAX-PLANCK-INSTITUT FÜR SOZIALRECHT UND SOZIALPOLITIK

Pension expenditures and public debt

6

Outline

1. Introduction: Pensions and the role of the Whitebook on pensions

2. Structural differences in in European pension systems

3. Common problems and causes for reform in Europe

4. Cures and policy response in Europe5. Specific role of occupational pensions in Germany6. Conclusions

7

2. Structure of Pension Systems in Europe

Figure 3: Gross relative pension level (Average pension in percent of average earnings)

Source: OECD, Pensions at a Glance, 2011

8

2. Structure of Pension Systems in Europe

9

2. Structure of Pension Systems in Europe

Figure 2: Public, occupational and private pension income in selected countries (Percent of total retirement income)

0%

10%20%30%

40%

50%60%

70%80%90%

100%

E D F I GB NL US CH

Public Pillar Occup. Pillar Private Pillar

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2. Systemic differences in supplemental pensions

Source: OECD Pensions at a Glance 2011

11

Outline

1. Introduction: Pensions and the role of the Whitebook on pensions

2. Structural differences in in European pension systems

3. Common problems and causes for reform in Europe

4. Cures and policy response in Europe5. Specific role of occupational pensions in Germany6. Conclusions

12

3a. Causes: Demography:Fertility, Longevity, Transition from Baby Boom to Baby Bust

USDE

-800 -400 0 400 800

0

10

20

30

40

50

60

70

80

90

100+

AT

-100 -50 0 50 100

0

10

20

30

40

50

60

70

80

90

100+

CH

-100 -50 0 50 100

0

10

20

30

40

50

60

70

80

90

100+

NL

-150 -75 0 75 150

0

10

20

30

40

50

60

70

80

90

100+

ES

-400 -200 0 200 4000

10203040506070809010

IT

-600 -300 0 300 600

0

10

20

30

40

50

60

70

80

90

100+

PT GR

-100 -50 0 50 100

0

10

20

30

40

50

60

70

80

90

100+

-100 -50 0 50 100

FR

-500 -250 0 250 500

0

10

20

30

40

50

60

70

80

90

100+

DK

-60 -30 0 30 60

0

10

20

30

40

50

60

70

80

90

100+

SE

-100 -50 0 50 100

0

10

20

30

40

50

60

70

80

90

100+

USA

3a. Causes: Demography

Figure 15: The force of aging in terms of the rate of economic growth

-0.01

0

0.01

0.02

0.03

0.04

0.05

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

FranceGermanyItalyJapanSpainSwedenUnited KingdomUnited States

Source: Own calculations based on OECD Social Expenditure database (SOCX, www.oecd.org/els/social/expenditure, November 2011).

14

3b. Causes: Design flaws (negative incentive effects)

R2 = 0,8554

10

20

30

40

50

60

70

0,00 2,00 4,00 6,00 8,00 10,00Index of implicit tax rate on working longerS

hare

of 6

0-64

yea

r ol

d m

ales

ret

ired

Japan

USASweden

UKGermany

FranceBelgium

Italy

Netherlandserlande

Canada Spain

Source: Gruber & Wise

15

LFP trends for men 60 to 64

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1960 1965 1970 1975 1980 1985 1990 1995 2000

Year

Prop

ortio

n

JapanSwedenUSUKGermanyBelgiumFrance

Source: Gruber & Wise

3b. Causes: Design flaws (negative incentive effects)

16Example: Germany

Fig. IV-1: Average retirement ages - West German men

19601961

1962

1963

19641965

1966196719681969197019711972

1973

1975

1976

1977

1978

19791980

198119821983

198419851986198719881989

1990199119921995

Reform 1972

58

59

60

61

62

63

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Year

56

57

58

59

60

61

62

63

1965 1970 1975 1980 1985 1990 1995-1

1

3

5

7

9

11

13

Retirement AgeUnemployment RateUnempl.R.(50-55)

Source: Börsch-Supan & Schnabel

3b. Causes: Design flaws (negative incentive effects)

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3c. Design Flaws: Failing adequacy (even perverse redistribution)

Figure 13: Old-Age Poverty Rates, 2010

(OECD, 2008)

0

5

10

15

20

25

30

35

Austria

Belgium

Czech

Repub

lic

Denmark

Finlan

d

France

German

y

Greec

e

Hunga

ry

Irelan

dIta

ly

Luxe

mbourg

Netherl

ands

Norway

Poland

Portug

al

Slovak

Repub

licSpa

in

Sweden

Switzerl

and

United

Kingdo

m

United

States

OECD

Source: OECD, Pensions at a Glance (2011)

18

Outline

1. Introduction: Pensions and the role of the Whitebook on pensions

2. Structural differences in in European pension systems

3. Common problems and causes for reform in Europe

4. Cures and policy responses in Europe5. Specific role of occupational pensions in Germany6. Conclusions

80.0%

85.0%

90.0%

95.0%

100.0%

105.0%

110.0%

115.0%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

SV-DK-EX

FL-DK-EX

SV-DK-EN

FL-DK-EN

SV-SQ-EX

SV-SQ-EN

FL-SQ-EX

FL-SQ-EN

Remove laborsupply restrict.Status quo

Fully fundedpensions Flat PAYG

pensions

Endog. HoursreactionFixed hours

Source: Börsch-Supan and Ludwig (2009)

Behavioral

Simulation exercise: Alternative paths of living standards in “Old Europe” (=DE+FR+IT)

4. Cures: work more, save more

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4. Cures: Some recent reforms

Figure 14: Synopsis of pension reform elements in Europe, 1980-2010

Retirement age Link of benefits to contributions

Indexation

Austria women 65 +

Germany all 67 (universal point sys) sustainability

France all 62 Basis of point system

Italy NDC NDC

Spain

Greece Partially

Denmark all 67 rev

Sweden DI NDC NDC

Norway point life expectancy

Finland UI tunnel scale factors

Netherlands EEA, DI

UK all 68 price wage

US all 67

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4a. Cures: Retirement Age (example: Germany)

59

60

61

62

63

64

65

66

67

68

1997

2000

2003

2006

2009

2012

2015

2018

2021

2024

2027

2030

2033

langj. Versicherte(abschlagsfrei)

AL/ATZ (abschlagsfrei)

Frauen (abschlagsfrei)

Schw erbehinderte(abschlagsfrei)

langj. Versicherte (vorzeitig mit Abschlägen)

AL/ATZ und Frauen(vorzeitig mit Abschlägen)

Schw erbehinderte (vorzeitig mit Abschlägen)

Source: Berkel & Börsch-Supan

Counteracting:Minimum number of service years

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4b. Cures: Shrinking PAYG systems

Increase basis for benefit calculation Change indexation from wages to prices (or

less) NDC: Notional defined contribution system QDC: Demographic or sustainability factors

(life expectancy, system dependeny ratio)

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4b. Cures: Shrinking PAYG and expanding prefunded pillars (example: Germany)

Figure 17: Projected Retirement Income Components, Germany, 2002-2040

0%

10%

20%

30%

40%

50%

60%

2007

2010

2013

2016

2019

2022

2025

2028

2031

2034

2037

2040

Ave

rage

pre

tax

pens

ion

as p

erce

nt o

f ave

rage

pre

tax

wag

e

Public pension (pay-as-you-go)

Riester Pensions if real return = 2,5% p.a.

Riester Pensions if real return = 4,5% p.a.

Source: Börsch-Supan, Bucher-Koenen, Reil-Held and Wilke (2008).

Supplemental pensions: 4% of gross earnings, 2.5% real return

Supplemental pensions: 4% of gross earnings, 4.5% real return

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4c. Curing the problems: Targeting and redistribution

Separate macro issues (sustainability) from micro issues (“fixes” for selected groups)

Basic/minimum pension plus linear schedule

Nonlinear schedule (AIME/PIA conversion)Political economy of reform

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Outline

1. Introduction: Pensions and the role of the Whitebook on pensions

2. Structural differences in pension systems3. Common problems and causes for reform4. Cures and policy response5. Specific role of occupational pensions in Germany6. Conclusions

26

5. Multipillar pension system

2002 2004 2005 2006 2007 2008 20090%

10%20%30%40%50%60%70%80% 73%

63%53% 54%

49% 49%45%

14%20% 19% 23%

28% 27% 30%

10% 13%19%

19% 18% 18% 20%

2% 4%9%

4% 5% 5% 5%

Households with multiple pension schemes

No old-age provision One Instrument Two InstrumentsThree Instruments

Source: SAVE 2003 - 2010

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Contribution of pAV and bAV to expected old-age income

2005 2006 2007 2008 20090

1020304050607080

Erwartetes Rentenniveau in % des erwarteten letzten Nettolohns

Altersklasse 18-34

private und betriebliche Rentegesetzliche Rente

2005 2006 2007 2008 20090

1020304050607080

Erwartetes Rentenniveau in % des erwarteten letzten Nettolohns

Altersklasse 55+

private und betriebliche Rentegesetzliche Rente

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Uptake: Riester, bAV, other

2002 2004 2005 2006 2007 2008 20090%5%

10%15%20%25%30%35%40%

7%13%

19%

26%31% 33%

38%

13%19%

23% 21% 23% 25% 27%

11%15%

23%

16% 15% 15% 15%

Spread of private pension provision

Riester-pension Occupational pensionsPrivate-pensions

Source: SAVE 2003 - 2010

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Targeting by household income

0 - 999€ 1000€ - 1999€

2000€ - 3999€

> 4000€0%

10%20%30%40%50%60%

19%30%

47% 48%

4%15%

35%

53%

4%13% 18% 23%

Private pension provision by disposable income

Proportion of households with private pension schemes

Riester-pension Occupational pensionOther pension schemes

Soource: SAVE 2010

-all instruments higher for the wealthier -Riester especially high among low income

Riester: Lack of knowledge about eligibility for subsidies

Nach Einkommensquintil: 123

4&5

31

0-999 1000-1999 2000-3999 4000+0

0.1

0.2

0.3

0.4

0.5

0.6

Anteil der Befragten mit bAV nach Einkommensklassen

200520062007200820092010

Can occupational pensions help? (a) reported participation

32

18-34 35-54 55+0

0.02

0.04

0.06

0.08

0.1

0.12

Anteil der Befragten, die sich nicht ausreichend abgesichert fühlen ...

staatlichdurch den Arbeitgeber privat

Can occupational pensions help? (b) subjective coverage

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Weiß Bescheid35%

Weiß Arbeitgeberbeitrag nicht23%Weiß eigenen Beitrag

nicht8%

Weiß weder noch33%

Wissen über bAV Beiträge

Causes again: lack of knowledge and transparency!

34Hauptschule Realschule Fachhochschule/Abitur

0

0.05

0.1

0.15

0.2

0.25

Item non-response "Besitz bAV" nach Finanzwissen und Bildung

<3 correct3+ correct

Lack of knowledge/transparency

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6. Conclusions: The European Dimension of Public and Private Pensions

Role of EU in public and private pensions: Large macroeconomic implications, especially for economic growth and financial stability

Problems: Demography, design, poverty prevention Some relevant for EU at large, others country-specific Large differences in system design: No “one size fits all”

EUpolicy Generally: “work more, save more” “Work more” has by far largest stabilizing impact, and

relevant for all EU member states (but: DE vs. FR vs. DK/SE) “Save more” through pAV and bAV; very different

approaches and philosophies in EU member states Still shockingly little knowledge about pAV and bAV Eligibility for Riester pAV; contributions (thus claims) for

bAV Multi-pillar systems: On the right path, but still

much to do