INTERNATIONAL PENSION RESEARCH INSTITUTE 10 TH INTERNATIONAL PENSION SEMINAR TOKYO, 22 NOVEMBER 2005 PUBLIC PENSION REFORM WHY? HOW? W. R. McGillivray Policy Associate Caledon Institute of Social Policy 1

POST WAR SOCIAL SECURITY IN INDUSTRIALIZED COUNTRIES – expansion during period of recovery/economic growth ILO Convention 103 long-/short-term benefits – consolidation during period of slower economic growth 1990 on – reforms due to demography unsustainability 2

PUBLIC PENSION SCHEMES Objective: Provision of adequate income for a retired person and his/her dependants which is affordable, sustainable and sufficiently robust to withstand potential economic or demographic shocks. 3

PUBLIC PENSION SCHEMES Pensions are transfers of resources from active workers to inactive retired persons at the times pensions are paid. Key to financing pensions is economic growth Long term perspective necessary 4

SOCIAL SECURITY REFORM ISSUES governments have implicit/explicit social security obligations must ensure proper governance of schemes participants’ obligations social security schemes transfer resources → political issue 5

SOCIAL SECURITY REFORM ISSUES (CONTINUED) take into account all social protection programmes and their interactions (including schemes covering public servants) governments can change schemes → winners/losers social security = component of market economy → globalization challenges → productivity implications 6

WHY REFORM? 1.to ensure schemes’ objectives are met income replacement throughout retirement poverty avoidance income maintenance for disabled persons and survivors 2. to remove abuses which: increase the cost of the schemes have undesirable labour market/social implications 3. to ensure the scheme’s sustainability 7

THE REFORM PROCESS proposals dissemination promotion discussion adoption implementation Risks: reform deadlock complicated reforms 8

PENSION SCHEME REFORM DB schemes have long term obligations → ratio annual expenditures ↑ for many years annual earnings government guarantees DB scheme 9

PENSION SCHEME REFORM types of DB pension scheme reform: parametric (changing DB scheme) structural (replacing DB scheme) results of a pension scheme reform are long delayed, hence: → opportunities for obfuscation → winners/losers are less obvious 10

PARAMETRIC REFORMS Three basic possibilities: 1.increasing the contribution rate 2.cutting pensions, e.g. by: reducing benefit accrual rate reducing cost of living adjustments 3.reducing the number of pensioners, e.g. by: increasing retirement age modifying conditions for receiving a pension 11

INCREASING RETIREMENT AGE great potential for reducing pension cost Japanese expectation of life at age 65 YearMalesFemales (est) →retirement periods are becoming longer 12

INCREASING RETIREMENT AGE (CONTINUED) → working lifetimes can be increased (provided jobs are available) retirement age increases must be implemented gradually contracting labour force may require later retirement age in order to maintain living standards 13

EXAMPLES OF PARAMETRIC REFORMS Increase contrib.CutReduce no. ratepensionspensioners CanadaXX GermanyXX JapanXXX USAX 14

STRUCTURAL REFORMS generally adaptations of ‘Chilean model’ - privately managed individual accounts DC schemes effect of reform cannot be known for many years governments are wary since under DC schemes: individuals bear investment risk replacement rate is uncertain and governments will be held responsible if the income of their aged populations is inadequate 15

SOCIAL SECURITY REFORMS CONCLUDING OBSERVATIONS reforms are necessary to take into account social, economic and demographic conditions reform focus has been on sustainability; but must also pay attention to benefit adequacy/equity possibility of parametric reforms is a strength of DB pension schemes social consensus on reform is necessary social security beneficiaries have shared in improved living standards; they must also share in potential declines in living standards 16