Pension Reform and Labor Market Policies In Central Europe Elaine Fultz Senior Specialist in Social Security International Labor Organization Budapest

2 Older population in Europe is growing rapidly Over the past 50 years, average life expectancy increase from 63 to 73. Is expected to rise to 80 by 2050.

3 Proportion of European population 60+ years Source: United Nations projections (2003), as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, EU 15 + Iceland, Switzerland, NorwayNew EU member States South Eastern Europe and MediterraneanCommonwealth of Independent States

4 Proportion of European population 80+ years EU 15 + Iceland, Switzerland, NorwayNew EU member States South Eastern Europe and MediterraneanCommonwealth of Independent States Source: United Nationas projections (2003), as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

5 Labor Market Participation No commensurate increase

6 Life expectancy at age 60 and average exit age from the labor force Life expectancy at 60 Average exit age (both sexes) malesfemales EU 15 + Norway Belgium Denmark Germany19.8 a 23.9 a 60.7 Greece20.1 b 23.1 b 59.4 a Spain20.3 c 24.9 c 61.5 France20.6 a 25.7 a 58.8 Ireland Italy20.4 c 24.8 c 59.9 Luxembourg Netherlands Austria Portugal Finland Sweden United Kingdom19.4 c 23 c 62.3 Norway Source: EUROSTAT database, as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

7 Life expectancy at age 60 and average exit age from the labor force Life expectancy at 60 Average exit age (both sexes) malesfemales New EU Member States Czech Republic Estonia Cyprus19.5 d 22.7 d 61.4 Latvia a Lithuania a Hungary Poland Slovenia a Slovakia SEE & Mediterranean Bulgaria Romania a Source: EUROSTAT database, as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

8 Total and older workers employment rates, 2002 Source: Eurostat (2004), as cited in Managing transitions: Governance for decent work, Report of the Director-General, Volume II, ILO: Geneva, 2005.

9 Pension reforms in the later 1990s Increase retirement age Privatization – “Averting the Old Age Crisis”

10 Retirement Ages – New EU States Current lawMenWomen Czech Rep. 1995, 2003increasing to 63 by 2013 by 2 months/year Increasing to (depending on no. of children raised) by 4 mos/yr in 2013 Estonia1998, in force Increasing to 63 in 2016 by 6 months/year Hungary1996increasing to 62 in 2001 by 1 year every second year Increasing to 62 in 2009 by 1 year every second year Latvia1998increasing to 62 in 2003 by 6 months/year Increasing to 62 in 2008 by 6 months/year Lithuania1994, 2000increasing to 62.5 in 2003 by 6 months/year Increasing to 60 in 2006 by 6 months/year Poland1998 (in force, 1999) 65, with early retirement eliminated beginning in , with early retirement eliminated beginning in 2007 Slovak Rep. 2003Gradual rise to age 62Same as for men Slovenia

11 Mixed labor market response Due to – –Early retirement options –Difficult labor market situation –Social/cultural factors

12 Pension privatization in the new EU member states Countries with mandatory, commercially managed individual savings accounts Countries without such scheme Hungary (1998)Czech Republic Poland (1999)Lithuania Latvia (2001)Slovenia Estonia (2002) Slovak Repub. (2003)

13 Early difficulties with privatization Small and undeveloped financial markets –the resulting high investment in government bonds prevents risk diversification High administrative costs –negative real returns on worker savings Transitional financing costs –weakened the capacity of pension systems to meet new demands from demographic aging

14 Transitional financing costs - Poland - Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe, Vol. 1, ILO: Budapest, 2002.

15 More recent perspective on how to deal with aging: (1) Raise employment rates –EU target: 70 percent for percent for women 50 percent for older workers

16 Employment rates in 2002 Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.

17 2. Extend working life European Council (Barcelona) set target for progressive increase of about 5 years by –Must take account of needs and rights of older people, especially those with poor working conditions, long working lives, and health problems.

18 3. Pension reforms Needed to complement effort to increase employment Eliminate or reduce incentives for early retirement Incentives to save more for own retirement Options for gradual retirement –Other –Address large, sustained transitional deficits from privatization –Reestablish minimum benefits

19 In Conclusion Challenges ahead are great No recipes or standard solutions Multidisciplinary approach required