Are the European pension systems adequate and sustainable? Jakub Wtorek European Commission Directorate General for Employment, Social Affairs and Inclusion Unit: Active Ageing, Pensions, Healthcare Tbilisi, 20 May 2011

Are the European pension systems adequate and sustainable? EU competences in the field of pensions National pension systems: an overview Recent trends in pension reforms EU indicators: adequacy and sustainability Pensions in the EU economic governance

EU competence in the field of pensions EU competence: –Free movement of workers (coordination of social security schemes) –Free movement of capital –Minimum guarantees in case of insolvency of employer and antidiscrimination –Soft coordination of pension policies Green Paper (2010) brought these issues together Challenge of maintaining holistic approach in the White Paper (2011 Q3)

EU pension objectives AdequacyAdequacy (solidarity and fairness between and within generations, adequate retirement incomes for all, access to pensions which allow people to maintain, to a reasonable degree, their living standard after retirement) SustainabilitySustainability (sound public finances, supporting longer working lives and active ageing, fair balance of contributions and benefits, promoting the affordability and ensuring the security of funded and private schemes) ModernisationModernisation (systems are transparent, well adapted to demographic ageing and structural change, people receive the information they need to plan their retirement)

Demographic change: old-age dependency ratios under different average exit age scenarios

Stylised illustration: Tiers in pension provision

3-Jul-16Directorate-General for Employment, Social Affairs and Equal Opportunities7 Basic principles of European pension systems

Wide variation in EU after reforms

9 Shift in typical EU worker pensions

Trends in pension reforms Strengthening of contributory principles –Increasing contribution periods, higher pensionable age  pension outcomes dependent on performance of labour markets Greater role for prefunding –Mandatory individual, enhanced voluntary, automatic enrolment, occupational  pension outcomes dependent on performance of capital markets Automatic adjustment mechanisms –Life expectancy, GDP and labour market growth  balancing the system at the expense of higher uncertainty for individuals

Market exposure of future pensioners in DC schemes The questions for countries that have opted for an important role for funded DC provision: –how to control the risk for the individual –how to give people a realistic idea about what can be obtained –how to consider for which income and career profiles these schemes are an appropriate solution –how to ensure the payout phase matches the original purpose of pension savings as efficiently as possible

At-risk-of-poverty rate for people aged 65+ Defined as a percentage of population with income after social transfers below the at- risk-of-poverty threshold. The threshold is set at 60% of the median equivalised income in a given country, thus the indicator treats poverty as a relative and not absolute concept

Severe material deprivation, 65+ Reflects the inability to afford 4 items considered by most people to be desirable or even necessary to lead an adequate life: –to pay their rent, mortgage or utility bills –to keep their home adequately warm –to face unexpected expenses –to eat meat or proteins regularly –to go on holiday –a television set –a refrigerator –a car –a telephone

Population 65+ at risk of poverty or social exclusion, 2009

3-Jul-16Directorate-General for Employment, Social Affairs and Equal Opportunities15 What are the expected effects of reforms? Change in Theoretical replacement rates and public pension expenditure between 2006 and 2046

Projected increase in public pension expenditure, Source: Ageing Report 2009 Social security old-age and early pensions are covered

Decomposition of the projected increase in public pension expenditure, EU Source: Ageing Report 2009 Social security old-age and early pensions are covered Public pension expenditure in the EU is projected to increase from 10.1% in 2007 to 12.5% in 2060 Population ageing effect: change in the dependency ratio (number of people aged 65 and more to the working age population) Eligibility effect: tighter eligibility conditions for public pensions Employment effect: increase in the number of employed Level of benefits: less generous public pensions

EU2020: pensions in European economic governance Europe 2020: the EU’s growth strategy for the coming decade Crisis: employment and public finances dimensions EU2020 recommendations: –To prolong working lives –To develop complementary private savings

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