European pension reforms Master PPD 13 /02 / 2009 Olivier Bontout - DREES Ministry of labour, family and solidarity, Ministry of health, youth and sports, Ministry of budget and public accounts

Pension reforms General framework A common challenge Main developments in current reforms Recent developments : labour market and pension prospects Some outstanding issues European approach - OMC

I – General framework Broad meaning Definitions Organisation

Broad meaning Face major life risks Distribution of risks Not only poverty relief in old age but also income replacement function

Size of government expenditures in 2003 (%GDP)‏ 0,9 Housing, social exclusion n.e.c.   2,1 Family and children Disability 1,8 Unemployment (including ALMP)‏ 7,6 Sickness, health care 12,3 Old age and survivors benefits 26,8 Total Social Protection 49,0 Total Government expenditures (including interests)‏ EU 25 Source Eusrostat; New Cronos and ESSPROS

Social protection expenditures in 2003 (by function)‏ Data for Cyprus are not available. Source Eusrostat; New Cronos and ESSPROS

Funded vs. unfunded (PAYG) Reserves… Definitions Funded vs. unfunded (PAYG) Reserves… Defined benefit (DB) vs. defined contribution (DC)‏ NDC…

Organization of pension systems Public – Social security General and mandatory Earnings related or flat rate Minimum income provision - within general pension schemes - separate targeted benefits Supplementary provision Occupational (linked to employer)‏ Voluntary

Adjustments - three generations Future tax-payers Current tax payers Current retirees

Adjusments - three channels Adjusting benefits Action on tax and contributions (including collection)‏ Working longer, Increasing retirement ages

II - A common pension challenge: adjustments needed Increase in life expectancy and dependency ratios Decline in effective retirement ages … reversal in recent years Contribution rates – further increases ?

Life expectancy at 60 and activity rates 55-64 Source Eurostat for Life expectancy and ILO (ES and SE 1970-2000, FR 1968-2000 , IT 1971-2000, UK 1971-1991)‏

Trends in dependency ratios / 15% 28% 1960 21% 33% 1980 14% 23% 35% 1990 40% 25% 18% Ratio population 70+ /20-69 58% 39% 27% Ratio population 65+ /20-64 80% Ratio population 60+ /20-59 2050 2025 2004 Note : EU25. Source : Eurostat 2005 demographic projections.

Demographic trends : EU12 more affected, in particular after 2020 and 2040 Source : Eurostat 2008 demographic projections.

A common challenge All systems are concerned: DB, DC, NDC, PAYG, funded, European States are not interdependent: public finance, mobility, common social rights and objectives,

III - Key elements arising from current pension reforms Strengthening incentives for working longer Developing a life-cycle approach and strengthening the link between contributions and benefits while reducing access to early paths out of employment

Key elements arising from current pension reforms (2)‏ Making pension systems more adaptable to structural changes in society Develop secure private pensions complementing and partially replacing public pension provision

IV – Recent developments Labour market – a recent reversal Benefits – the key challenge of working longer Private pensions Flexibility in retirement shortly on web – CY calculations agreed recently Based on replies to questionnaire and on comments received on the first version circulated by 2/3 of MSs. So I would like to thank you for these comments and we also received a few more since last week.

Employment of older workers : a huge potential of progress Recent improvements, but still huge potential Still decreasing employment rate from age 55 Most transitions from employment to pensions are not direct Between Member States : SIGNS of divergence in spite of average increase observed in recent years Between genders : slow convergence Between qualifications : signs of divergence And these signs of divergence are raising questions on future adequacy as we know that most reforms include a stronger link between contributions and benefits

Recent increases of employment of older workers Source : LFS

Older workers employment (55-59)‏

Older workers employment (60-64)‏

Part time employment (55-64)‏

Part time employment (55-64)‏

Decreasing employment rate from age 55 Declines clearly begins at 55 until 64 This highlights the key role of increasing employment rates from 55 – i nthe age bracket 55-59 to reach the Lisbon target of 50%.

The key role of reducing early exits from the labour market Most transitions from work to retirement are not direct – which you can see here (these are provisional figures). The share through retirement OR early retirement significantly is around 50% for 60-64 and exceeds 50% significantly only for 65+

The key role of promoting longer working lives Employment rates of older workers : some signs of divergence Between States : divergence Between genders : slow convergence Between qualifications : divergence Between Member States : SIGNS of divergence in spite of average increase observed in recent years Between genders : slow convergence Between qualifications : signs of divergence And these signs of divergence are raising questions on future adequacy as we know that most reforms include a stronger link between contributions and benefits

Non convergence between MSs? Average standard deviation of employment rates 55-64 and 25-54 Source : LFS – Note : Total for all Member States available , EU* for a group of Member States where are available all the period long (BE, DK, DE, IE, EL, FR, IT, LU, NL, UK)‏ -30- 30 Commission européenne

Slow convergence between Genders ? Employment rates by gender for 55-64 in EU -31- 31 Commission européenne

Divergence between skill levels? Employment rate of men 55-64 in EU25 -32- 32 Commission européenne

Projected long term trends Adequacy : theoretical replacement rates Sustainability : expenditures projections -33- 33 Commission européenne

The key role of promoting longer working lives Longer working lives strongly impacts on : adequacy – on individual replacement rates compensation for declines induced by ongoing reforms (ISG-OECD theoretical replacement rates)‏ sustainability – on future expenditures compensation for demographic pressure and decline of average benefit ratio (AWG projections)‏ Between Member States : SIGNS of divergence in spite of average increase observed in recent years Between genders : slow convergence Between qualifications : signs of divergence And these signs of divergence are raising questions on future adequacy as we know that most reforms include a stronger link between contributions and benefits

Trend of replacement rates : effect of enacted reforms at a given retirement age 2005-2050 A trend toward a decline in most statutory schemes Source : Stylised illustration from ISG results on gross replacement rates

How to compensate for this decline ? Working longer and private pensions Source : Stylised illustration from ISG results on gross replacement rates

Trends of future pension expenditures Source : AWG projections

Decomposition of trends of public pension expenditures (2004-2050)‏ Source : AWG projections

Development of private pensions Private pensions vs state pensions: voluntary or mandatory DB or DC schemes, individual or occupational offered by companies exclusively or with some role played by the state. The risk is shifted from the state to individuals/employers/private companies. 10-Nov-18 Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

The role of private and supplementary pensions in the EU An expected increase of the contribution of privately managed schemes to the income of retired people But public PAYG pension schemes are expected to remain the principal source of income of pensioners in all but a few Member States 10-Nov-18 Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

Current situation Very high (More or around 50%)‏ DK NL UK SE DE IE FI PT Medium (between 10% and 25%)‏ BE EE HU PL SI CZ ES LV LT LU AT SK EL FR IT Low or negligible (<10%)‏ Average contribution to the income of retired people Very high (> 90%)‏ High (between 50% and 90%)‏ Medium (between 10% and 50%)‏ Low (<10%)‏ Coverage (% of the workforce)‏ 10-Nov-18 Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

Current situation and expected evolution in selected countries 10-Nov-18 Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

V - Some key issues Concerns about equity and poverty Compulsion vs. incentives : private pensions and working longer How to fully restore social and financial sustainability ? -43- 43 Commission européenne

Key issues (1)‏ Concerns about equity and poverty Risks related to inadequate pension provision A revival of minimum income provision -44- 44 Commission européenne

Projected evolutions : adequacy and sustainability Source : Stylised illustration from ISG and AWG results (public pension schemes include the funded tier of statutory schemes)

A need for appropriate monitoring tools How to strengthen the role of minimum pensions and solidarity in pension systems ? Poverty risk among elderly remains generally higher than overall population Links between level of benefits, degree of means-test, incentives and indexation rules A need for appropriate monitoring tools -46- 46 Commission européenne

Poverty risk among elderly Source Eurostat, income data -47- 47 Commission européenne

Source : ISG results on gross replacement rates Theoretical replacement rates : effect of indexation 10 years after retirement (2005-2015) Source : ISG results on gross replacement rates

Key issues (2)‏ Compulsion vs. incentives : private pensions and working longer Working longer : choice, incentives for earlier / deferred retirement, partial retirement Private pensions : incentives and coverage -49- 49 Commission européenne

Private pensions – key issues Coverage and solidarity Fiscal incentives : efficiency, costs and equity issues Risk sharing Transparency and portability Information and financial literature Admin charges Security 10-Nov-18 Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

Working longer Importance to review incentives structures Labour supply but pension reform can not do everything Labour demand -51- 51 Commission européenne

Retirement age and flexibility in retirement age Ongoing changes Retirement age and flexibility in retirement age Adaptation of early exits schemes -52- 52 Commission européenne

Retirement: incentives and behaviour Source : Illustration from SPC report on flexible age of retirement (forthcoming), Replacement calculations from EU Commission-OECD project ‘’Modelling pension entitlements'

Compulsion vs. incentives : Retirement age Compulsion vs. incentives : Changes in retirement age (DE, DK, UK)‏ More flexibility in choice of retirement age and transitions from work to retirement combination, part-time work… -54- 54 Commission européenne

Flexible age of retirement Strength of incentives (notably for lower wages)‏ Conditions to combine earnings and pensions Importance of accurate understanding of pension rules Importance to open up labour markets

Early exits from the labour market A high take- up - around 20% of population 55-64 on average - Does not really decline from 55-59 to 60-64 Reforms in most European States are already on the way and plans for further steps in about half States. Trends seems on decline though difficult to assess

Variety of take up of early exit schemes HU, NL, LT, RO, FI, SE BG, DK, EE, SI, SK, UK IE, LV Mainly disability FR CY, DE, PT No main take-up or others BE, LU, PL ES, CZ Mainly unemployment or early retirement Main benefits in take up High (>≥20%)‏ Medium (Between 10% and 20%)‏ Low (<10%)‏ Take up as a share of population 55-64 Table 1 provides an overview crossing levels of coverage and main type of take-up Note: (*) stands for not available, (/) for not applicable (no scheme). Source: National replies to the SPC questionnaire. These figures are generally taken from administrative sources are not necessarily completely comparable. Figures generally refer to 2006. <To be added: include respective dates for Member States where and when different >.

Early retirement and unemployment benefits Reforms aim in particular at : Ensuring that employers bear the costs (at least a significant share), Finding an appropriate manner to compensate for particularly demanding or hazardous jobs, Tightening eligibility rules or closing schemes, Improving working conditions and help unemployed older workers back into the labour market. 4 main dimensions arise from replies to questionnaire: - Ensuring that employers bear the costs (all or at least a significant share), Finding an appropriate manner to compensate for particularly demanding or hazardous jobs, This relates in particular to categories with shorter life expectancy Tightening eligibility rules or closing schemes, Improving working conditions and help unemployed older workers back into the labour market.

Reforms of invalidity pensions These reforms aim in particular at offering better possibilities to combine benefits and work, retraining, improving adaptation of enterprises, including of workplaces. strengthening incentives both for employers to employ the people with reduced capacity for work, while incentives for beneficiaries can also be reviewed to reduce barriers to returning to working life. The prevention of invalidity and development of professional rehabilitation of people with health problems can also make an important contribution and it has to start from an early age.

Key issues (3)‏ How to fully restore social and financial sustainability ? Importance of an integrated approach Development of automatic and semi – automatic adjustment mechanisms: automatic mechanisms vs. regular reviews Importance of transparency -60- 60 Commission européenne

VI – European approach OMC Social protection systems (Pension and health) to be reformed to ensure: - Adequate benefits (poverty and income replacement for pensions, access for health care)‏ - Financial sustainability - Adaptation to societal / labour market changes Adequacy and Sustainability are mutually reinforcing : virtuous or vicious circle Objectives for social protection / pensions

Open Method of Coordination for Social Protection and Social inclusion Definition of common Objectives and Agreed indicators National reporting Evaluation in order to facilitate mutual learning and exchange of good practices

Streamlined OMC - indicators Overarching indicators (14)‏ Groups of indicators by strand: Social Inclusion Pension Health

Conclusion Pension reform in progress Working longer: breakthrough needed Promoting longer working lives involves not only pension reform Improve transparency and governance to allow policy decisions on priorities