1 Public Pension Reform and Fiscal Consolidation Carlo Cottarelli Director Fiscal Affairs Department May 20, 2010 Paris

2 Public Pension Spending Sources: OECD; WEO; and IMF staff estimates. Note: Countries included in the sample are Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

Pension Spending Across Countries 3

Role of Public and Private Pensions AustraliaCanadaUnited StatesUnited Kingdom JapanGermanyFranceItaly Public Pension Expenditure and Private Pension Fund (in percent of GDP) Private Pension Fund Assets (left axis)Pension expenditure (right axis) Source: OECD.

Public Pensions Are an Important Source of Retirement Income 5 Source: Disney and Johnson (2002). Bottom Quintile of Pensioners Income Distribution Top Quintile of Pensioners Income Distribution Average

AdvancedEmerging Life expectancy AdvancedEmerging Fertility rate AdvancedEmerging Old-age dependency ratio Demographics Will Have Large Effects on Pension Spending over Sources: US Census Bureau (2009), European Commission (2009), and IMF staff estimates. Note: Sample include G-20 economies. 6

7 Pension Reforms Have Taken Different Shapes Main Elements of Pension Reforms in Selected OECD Countries Sources: Martin and Whitehouse (2008), OECD (2007), Whiteford and Whitehouse (2006). DC=Defined contribution; NDC= notional defined contribution. New Zealand

Demographic effects 0.4 Employment effects 1.8 Pension reforms 7.1 percent of GDP, percent of GDP, 2030 Pension expenditure (in percent of GDP) 10.3 percent of GDP, 2030 These Reforms Partially Offset Unfavorable Demographics Sources: US Census Bureau (2009), European Commission (2009), and IMF staff estimates. Note: Sample includes advanced-G20 economies.

Despite Reforms, Pension Spending is Projected to Rise Over

Future Pension Spending Will Add Substantially to Public Debt 10 NetPresent Value of Future Pension Spending Increases (in percent of GDP) Average Advanced Emerging

11 Key Assumptions in Long-term Pension Projections in the EU Ageing Report (EU-27) Are the Projections Too Optimistic? Source: European Commission (2009) Avg Increase: Demographic Assumptions Life Expectancy (females) Life Expectancy (males) Net Migration (% population) Labor Market Assumptions Employment rate (15-64) Participation rate (15-64) Participation rate (55-64) Macroeconomic Assumptions Labor Productivity TFP TFP: EU

Sensitivity of Key Assumptions 12

Risks to the Projections 13 Source: United Nations, National Research Council, 2000, Beyond Six Billion: Forecasting the World's Population and WEO. Share of Population 65 Years and Older (in percent) Africa China Japan Latin America North America South-East Asia Southern Europe Western Europe World Actual Projected

Productivity Growth and Assumptions in Selected Countries (EU-27) 14 Average =64.4 Average =1.5

15 A Look at Output Levels Advanced EconomiesEmerging Economies Current WEO Oct WEO Real GDP (In levels, 2000=100)

16 Percent change in replacement rates, Risks to the Projections

Parametric Pension Reform Options 17

18 Pension Reform: Preferred Option is Raising Retirement Ages Advanced G20 Emerging G20 Life Expectancy at the Statutory Retirement Age

19 Other Options: Increases in Contributions CanadaFranceGermanyItalyJapanKoreaUnited KingdomUnited States Income taxes Social security contributions, employees and employers Tax Wedge, in percent of total labor costs

20 Percent change in replacement rates, Other Options: Benefit Reductions

EU-5 Countries: Outlook for Fiscal Balance Versus 2006 Stability Program 1/ (In percent of GDP) 21 1/ Solid line refers to 2006 Stability Program. Dashed line refers to IMF, World Economic Outlook, April 2010 estimates and projections. EU-5 denotes simple average of France, Germany, Italy, Spain, and United Kingdom

22 General Government Gross Debt in G-7 Economies, (In percent of GDP)

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