 Axia Economics Comparing pension systems Methodology Selected results for OECD countries, Eastern Europe/Central Asia, Latin America/Caribbean Edward Whitehouse

 Comparing pension systems oFiscal approach: projections of pension expenditure oInstitutional approach: describing pension systems’ parameters oIncome-distribution analysis: comparing incomes of older people and the population as a whole

 A microeconomic approach oModel of pension entitlements at the individual level oGoal: quantitative indicators of pension-system parameters for cross-country monitoring of retirement-income systems oConsistent across a broad range of countries oCovers all mandatory pensions resource-tested schemes (including social assistance) basic schemes minimum pensions earnings-related public and mandatory private schemes mandatory defined-contribution plans oIncludes effect of personal income tax and social security contributions

 A microeconomic approach oFull-career workers contribute every year from age 20 (or standard entry age) to normal pension eligibility age oAcross the earnings distribution: (0.3 to 5 times average pay) oAll currently legislated reforms fully in place ‘steady-state’ assumption new labour-market entrants oMacroeconomic assumptions earnings growth (individual and economy): 2% real rate of return (on funded pensions): 3.5% discount rate (for actuarial calculations): 2% mortality rates: latest data for individual countries and regional averages

 Results oRelative pension value pension entitlement as a proportion of economy-wide average earnings oIndicators of redistributive power of pension systems overall generosity of schemes: average pension value potential resource transfer to pensioners: average pension wealth

 Pension values

 Pension values: OECD

 Pension values: OECD

 Pension values: OECD Gross pension value Earnings Switzerland Norway Belgium

 Pension values: OECD

 Pension values: OECD

 Pension values: OECD

 Pension values: ECA Gross pension value Earnings Bulgaria Lithuania Croatia

 Pension values: ECA

 Pension values: LAC Gross pension value Earnings Costa Rica Dominican R

 Pension values: LAC Gross pension value Earnings Costa Rica Peru Colombia Dominican R Mexico El Salvador Chile

 Pension values: LAC Gross pension value Earnings Costa Rica Peru Colombia Argentina Dominican R Mexico El Salvador Chile

 Pension values: LAC Gross pension value Earnings Costa Rica Uruguay Peru Colombia Argentina Dominican R Mexico El Salvador Chile

 Redistributive power oAll pension systems redistribute income in many complex ways both between and within generations oFocus on one aspect: pension benefits of workers at different earnings levels oAn ‘index of redistributive power’ of pension systems that is zero if rich and poor workers get the same replacement rate (e.g., most funded plans, some public, defined-benefit schemes) is one if rich and poor workers get the same pension amount (e.g., a universal, flat-rate ‘citizens pension’)

 Role of the tax system oPersonal income tax systems are progressive so average effective tax rates are lower for people when they are retired than when they were working (if replacement rates are less than 100 per cent) oMost countries have concessions for older people in their personal income taxes favourable treatment of pensioners (e.g., extra allowances) favourable treatment of pension income oPensioners usually not liable for social security contributions (or pay at a much reduced rate) oTherefore, net replacement rates are higher than gross the personal tax system plays an important role in old-age support

 Difference in taxes paid by workers and pensioners

 Difference in taxes paid by workers and pensioners

 Difference in taxes paid by workers and pensioners

 Gross and net replacement rates: Germany

 Structure of net replacement rate: Germany

 System generosity oCalculate average pension value relative to economy-wide average earnings oUse same synthetic earnings distribution for all countries

 System generosity oCalculate average pension value relative to economy-wide average earnings oUse same synthetic earnings distribution for all countries

 Potential resource transfer oConvert weighted average of relative pension value into pension wealth oRelationship between pension value at retirement and pension wealth depends on: indexation of pensions in payment pension eligibility age country-specific mortality

 Calculating pension wealth oPension eligibility age

 Calculating pension wealth oIndexation

 Calculating pension wealth oCountry-specific mortalityCountry-specific mortality e.g., life expectancy of Hungarian men is six years below OECD average this reduces value of pension wealth by 19 per cent in Australia, France, Japan, New Zealand and Switzerland, life expectancy is two years above OECD average this increases value of pension wealth by 7-8 per cent

 Structure of pension systems: role of basic schemes Estonia Czech Republic Lithuania Canada Norway Japan Netherlands United Kingdom Argentina Ireland New Zealand BasicMeans-testedDBDC Per cent of weighted average of total pension wealth by source

 Structure of pension systems: role of targeted schemes Colombia Iceland Australia Canada Dominican R Per cent of weighted average of total pension wealth by source

 Structure of pension systems: role of DC schemes Costa Rica Uruguay Argentina Dominican R Colombia El Salvador Chile Mexico Peru Per cent of weighted average of total pension wealth from DC scheme

 Structure of pension systems: role of DC schemes Sweden Bulgaria Costa Rica Uruguay Hungary Argentina Lithuania Estonia Macedonia Poland Latvia Dominican R Croatia Australia Colombia El Salvador Chile Mexico Kazakhstan Peru Per cent of weighted average of total pension wealth from DC scheme

 Conclusions oMicroeconomic modelling of individual pension entitlements is a useful tool consistent approach across countries with very different retirement-income systems forward-looking comprehensive: covering all mandatory sources of retirement income incorporates effect of tax system can isolate the impact of pension policy choices from the effects of earnings distribution, macroeconomic performance and demographics on the retirement-income system

 Future oGender oDisability and survivors’ benefits oPension entitlements and age of retirement oSensitivity analysis oPartial careers oSpecial schemes (e.g., public-sector workers) oVoluntary schemes (e.g., occupational plans) oIncorporate financing of benefits oExtend to other regions oRegular updates