Raising Effective Retirement Ages: Impact and Design Issues Regional Pension Policy Workshop Majuro, April 25-29, 2016 Thank you for providing me the opportunity here today to present the key findings of our recent study on fiscal policy and income inequality. Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many countries have faced, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever is the desired level of redistribution, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.   The design of these growth-friendly, efficient redistributive fiscal policies is the focus of my presentation today. It may seem surprising that the Fund is entering into this debate on the design of redistributive policies. The truth of the matter is that we have been at this for a long time. Assessing the effect of tax and expenditure policies on efficiency, and any potential tradeoffs with distributional goals, has long been an important component of the IMF’s policy advice, particularly in the context of its technical assistance to member countries. Furthermore, the design of Fund-supported programs is inevitably influenced by the authorities’ distributional objectives. Our concern for the poor in the design of Fund-supported programs has a longstanding history, going back to the 1980s. The 2011 Review of IMF programs—the “Conditionality Review”—indicated that an increasing number of Fund programs are taking into consideration social aspects, and that social spending has largely been safeguarded in programs. In some countries, such as Sierra Leone, and Togo, conditionality on subsidy reform was accompanied by an analysis of its distributional impact, and, in some cases, by conditionality on measures to protect the poor. Income distribution issues also surface during the Fund’s surveillance of member’s economic policies, especially during discussions of the potential effects of tax and expenditure reforms. I should also highlight the other reason why we are focusing on this issue, that is, the pressure on countries to redistribute, as reflected in public surveys. Our members would like to explore with us how they can pursue distributive policies in an efficient manner. The key message that I want to convey today is that when it comes to fiscal redistribution, design matters. This is consistent with another recent IMF study, which finds that, on average, fiscal redistribution has been associated with higher growth. In our view, there is a diversity of experience across countries with redistributive policies. Some redistributive fiscal policies can help improve efficiency and support growth, such as those that enhance the human capital of low-income households. For other redistributive fiscal policies, a tradeoff between equality and efficiency may be involved. But even when these tradeoffs exist, the appropriate design of policies can help to minimize their adverse effects on incentives to work, save, and invest. Csaba Feher Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management

Some Conceptual Clarifications Retirement from a particular job ≠ retirement from the labor market (particularly important from a disability perspective) Retirement from the labor market ≠ retirement into the pension system What matters is not life expectancy at birth but at retirement age Retirement age increases must compensate not only for longevity improvements but longer education, too Nominal retirement age is material only to the extent of explaining effective retirement age

Retirement age: major LM policy instrument Reasons for retiring from labor market

Effective Retirement Ages

Design Issues Uniformity Extent of flexibility Women live longer Women have shorter formal sector work histories and lower wages Occupational differentiation Extent of flexibility Minima and maxima Treatment of early and deferred retirement Lead time and pace of increase Expectations, career strategies >> typically no less than 3 years lead time Lead time >> announcement effect Pace of increase: typically no faster than 6 month per year equivalent

Emerging Trends and Practices Differentiated >> Uniform Rising to at least 65/65 but often to 67/67 with 70/70 already legislated in cases Lead time: 5 years but occasionally up to 10 years (depending on fiscal urgency and the forgone increases) Pace: between 3 month/year up to 6 months/per year Automatic increases Constant life expectancy at retirement (after increase) Constant ration of working life to non-working periods Flexibility with actuarially neutral deferment bonuses and stricter early retirement deductions (with retirement subject to minimum benefit threshold)

Some examples Australia 65 to 67 for age pension 2009 Azerbaijan Belgium Tightening early retirement 2010 Bolivia 65 to 58 (!) Brunei 55 to 60 Bulgaria 63/60 to 65/63 2012 Canada Cuba 60/55 to 65/60 2008 Curacao 60 to 65 2013 Czech Republic to 65 Denmark Early retirement conditions tightened Egypt Estonia France Greece 60 to 65 for women Guatemala 60 to 62 2011 Hungary 62 to 65 India 65 to 60 (!) for noncontributory means tested scheme (Indira Gandhi) Ireland 65 to 68 Italy 60 to 65 for public sector, 63 to 65 for women in private sector Automatic increases with LE. Kazakhstan 5 8to 63 for women Latvia Lithuania 62.5 to 65 Netherlands 65 to 66 in basic, with deductions/increments for early/deferred retirement Norway   Poland 65/60 to 67 Slovenia Service time dependent Ras go up by 2 years, on average South Africa from 65/60 to 60/60 in the Old Age Grant Spain 65 to 67 for age pension, tighter early retirment conditions Turkey 60/58 to 65/65 Ukraine from 55 to 60 for women UK 60 to 66 for state pensions

PEGDP = ODR * (1/PR) * RR * WGDP *ER Fiscal Impact PEGDP = ODR * (1/PR) * RR * WGDP *ER Fiscal impact can be estimated by the change in the eligibility ratio: pensioners/population over 65 (or the cut-off used in the other indicators) This is a ceteris paribus overestimation of the fiscal impact: Longer careers will lead to higher pensions (even if the increase is not actuarially fair) Some people will be unable to work longer >> other forms of transfers will reduce the reform’s net fiscal yield

Welfare and Equity Impact Welfare impact ambiguous Longer working careers >> higher monthly pensions (typically) Shorter withdrawal period >> lower total benefit Welfare impact is heterogeneous Equity impact Intergenerational equity improves Constant labour demand hypotheses is wrong on the longer run(lump of labor fallacy) but… … labor markets take time to adjust and … there are circumstances where there may be crowding-out (homogenous, low-tech sectors/economies) Intra-generational vertical equity may worsen Better-off pensioners may benefit more, ceteris paribus Low-skilled, low-paid workers have lower pensions > they need longer careers but… >… they tend to die younger, >… their skills become obsolete faster

Thank you! Thank you for providing me the opportunity here today to present the key findings of our recent study on fiscal policy and income inequality. Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many countries have faced, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever is the desired level of redistribution, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.   The design of these growth-friendly, efficient redistributive fiscal policies is the focus of my presentation today. It may seem surprising that the Fund is entering into this debate on the design of redistributive policies. The truth of the matter is that we have been at this for a long time. Assessing the effect of tax and expenditure policies on efficiency, and any potential tradeoffs with distributional goals, has long been an important component of the IMF’s policy advice, particularly in the context of its technical assistance to member countries. Furthermore, the design of Fund-supported programs is inevitably influenced by the authorities’ distributional objectives. Our concern for the poor in the design of Fund-supported programs has a longstanding history, going back to the 1980s. The 2011 Review of IMF programs—the “Conditionality Review”—indicated that an increasing number of Fund programs are taking into consideration social aspects, and that social spending has largely been safeguarded in programs. In some countries, such as Sierra Leone, and Togo, conditionality on subsidy reform was accompanied by an analysis of its distributional impact, and, in some cases, by conditionality on measures to protect the poor. Income distribution issues also surface during the Fund’s surveillance of member’s economic policies, especially during discussions of the potential effects of tax and expenditure reforms. I should also highlight the other reason why we are focusing on this issue, that is, the pressure on countries to redistribute, as reflected in public surveys. Our members would like to explore with us how they can pursue distributive policies in an efficient manner. The key message that I want to convey today is that when it comes to fiscal redistribution, design matters. This is consistent with another recent IMF study, which finds that, on average, fiscal redistribution has been associated with higher growth. In our view, there is a diversity of experience across countries with redistributive policies. Some redistributive fiscal policies can help improve efficiency and support growth, such as those that enhance the human capital of low-income households. For other redistributive fiscal policies, a tradeoff between equality and efficiency may be involved. But even when these tradeoffs exist, the appropriate design of policies can help to minimize their adverse effects on incentives to work, save, and invest. Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management