1. International Trends in Pension Reforms Regional Pension Policy Workshop Majuro, April 25-29, 2016
Thank you for providing me the opportunity here today to present the key findings of our recent study on fiscal policy and income inequality.
Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many countries have faced, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever is the desired level of redistribution, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.
The design of these growth-friendly, efficient redistributive fiscal policies is the focus of my presentation today. It may seem surprising that the Fund is entering into this debate on the design of redistributive policies. The truth of the matter is that we have been at this for a long time. Assessing the effect of tax and expenditure policies on efficiency, and any potential tradeoffs with distributional goals, has long been an important component of the IMF’s policy advice, particularly in the context of its technical assistance to member countries. Furthermore, the design of Fund-supported programs is inevitably influenced by the authorities’ distributional objectives.
Our concern for the poor in the design of Fund-supported programs has a longstanding history, going back to the 1980s. The 2011 Review of IMF programs—the “Conditionality Review”—indicated that an increasing number of Fund programs are taking into consideration social aspects, and that social spending has largely been safeguarded in programs. In some countries, such as Sierra Leone, and Togo, conditionality on subsidy reform was accompanied by an analysis of its distributional impact, and, in some cases, by conditionality on measures to protect the poor. Income distribution issues also surface during the Fund’s surveillance of member’s economic policies, especially during discussions of the potential effects of tax and expenditure reforms. I should also highlight the other reason why we are focusing on this issue, that is, the pressure on countries to redistribute, as reflected in public surveys. Our members would like to explore with us how they can pursue distributive policies in an efficient manner.
The key message that I want to convey today is that when it comes to fiscal redistribution, design matters. This is consistent with another recent IMF study, which finds that, on average, fiscal redistribution has been associated with higher growth. In our view, there is a diversity of experience across countries with redistributive policies. Some redistributive fiscal policies can help improve efficiency and support growth, such as those that enhance the human capital of low-income households. For other redistributive fiscal policies, a tradeoff between equality and efficiency may be involved. But even when these tradeoffs exist, the appropriate design of policies can help to minimize their adverse effects on incentives to work, save, and invest.
Csaba Feher
Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management

2. Drivers of Reforms Primarily: short-term fiscal considerations
Existing or imminent social security deficits
Declining compliance and ineffective enforcement plus
…early retirement and disability > high system dependency
Long-term sustainability considerations
Demographics: life expectancies, fertility, migration,
Actuarial imbalances: post-war windfall, coverage expansion, design shortcomings
Fairness
Lack of uniformity: special regimes for preferred sectors
Intergenerational inequity: net transfers vs. net taxes
Ideology
Smaller and different role for the state
Greater reliance on private sector and individual responsibility

3. Types of Reform Parametric Reforms
(e.g. retirement age, indexation, benefit formula)
Objectives - unchanged
Instruments, size - unchanged
Parameters - amended
Structural
(e.g. partial privatization and later nationalization)
Objectives - unchanged
Instruments, size - amended
Paradigmatic
(e.g. poverty alleviation or consumption smoothing only)
Objectives - amended

4. Parametric DB reforms: examples
Eligibility
Harmonization between men and women, and across schemes/occupations;
Tightening early retirement conditions;
Increasing normal retirement ages
Automatic adjustments reflecting changes in age-specific life expectancy;
Minimum service time requirement
Indexing benefits
Marked shift away from wage indexation to CPI or CPI-heavy composites;
Conditional and bounded indexation;
Automatic adjustments reflecting some fiscal benchmark;
Parameters/formulae
From final salary towards full career;
Relatively higher accrual (or at least not less) for later years of service;
Benefit caps

5. Structural Reforms: Examples
Expanding coverage
Reducing categorical exemptions of occupations, types and levels of income
Non-contributory basic pensions, supplements and social pensions;
Matching contributions, auto-enrollment;
Parallel mandates (multi-pillar systems)
Augmenting unfunded DB with DC to address single issuer risk and lack of geographic diversification;
Unification, uniformity
Closing (possibly liquidating) civil service and other special schemes;
Privileged pensions pre-funded
Gradual enforcement of uniformity across schemes even if institutional segregation prevails;

6. Paradigmatic Reforms: Examples
Eliminating ex-ante, intentional redistribution
Replacing traditional Bismarckian social security with privately managed DC
Reducing the role of the state to poverty alleviation
Replacing earnings-related DB schemes with basic flat;
Changing the nature of state involvement
State becomes regulator and ultimate guarantor instead of operator of DC schemes;
Re-allocation of longevity risk in the payout phase
Mandating partial or full annuitization instead of / in addition to lumpsum and phased withdrawal;

7. Constraints to Reforms
Legal – Constitutional
General principle of prohibiting retroactive legislation;
Legal/constitutional protection of earned rights (broad range of interpretations)
Fiscal
Some reforms are very pricey
Distributional and welfare
Time needed to adjust expectations
Prevalent perception of equity
Contextual, Administrative
Financial sector development
Lack of data and administrative infrastructure
Political
Rent-seeking behavior by both pensioners and politicians;

8. Fiscal Impact
Cash/flow and accrual/stock consequences can have the same or opposite directions and can differ greatly in magnitude!
Quickest cash and accrual yields: stock of pensioners
Benefit indexation (depending on price and wage dynamics)
Nominal, real or relative caps and cuts, including benefit taxation
Slow cash and accrual yields: future retirees
- Benefit formula
Positive cash yields and possibly ambiguous accrual impact
Revenue expansion: contribution base, rate
Retirement age increase
Negative cash yields and ambiguous accrual impact
Partial privatization of social security (mandatory DC)
Negative cash and accrual yields
- Non-contributory poverty alleviation schemes

9. Welfare Impact
Fiscal objectives dominate reform design (in most cases)
Reducing the return on contributions >> on average, future pensioner receive less lifetime benefits for the same contributions or have to pay more for the same benefit
Changing internal redistributive features
All else is secondary in the policymaking process (transparency, financial sector development, etc).
Welfare impact needs distributional analyses
Fiscal neutrality requires compensating changes in the benefit distribution
“Welfare” itself is ambiguous:
Across stages of lifecycle
Present value terms vs. cash (as in the case of actuarially unfair retirement age increase)
Whose welfare: there is no average pensioner

10. Equity Impact Equity is in the eye of the beholder
Horizontal equity: same IRR across the contribution distribution
Vertical equity: differentiated IRR across contribution distribution
Inter-generation equity: same (horizontal/vertical) equity features within the same cohort
Intra-generational equity: different equity features across cohorts
Not just theory: equity influences political and, therefore, fiscal sustainability
Higher contributions for same benefits >> eroding compliance
General revenue financed support to partial coverage scheme imply inequitable tax policy
Equity is perceptional: no generally applicable definition
Reforms change equity features: different impact on groups of different educational attainment, income and asset position, etc.

11. Any Learning? Reforms need time to take effect
Grandfathering existing rights
Lead-time to adjust expectations
May need more then 10 years of continuing commitment (e.g. retirement age increase)
Policymakers may need to choose between fiscal sustainability, adequacy and equity
Not all systems and reforms are suitable for every country
Real risk: public/state pensions will be paid no matter what
There is no substitute for a well-informed and future-conscious public….
- Relevant information rendered in an accessible manner
…but procedural and fiscal rules in policymaking can help.

12. Thank you!
Thank you for providing me the opportunity here today to present the key findings of our recent study on fiscal policy and income inequality.
Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many countries have faced, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever is the desired level of redistribution, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.
The design of these growth-friendly, efficient redistributive fiscal policies is the focus of my presentation today. It may seem surprising that the Fund is entering into this debate on the design of redistributive policies. The truth of the matter is that we have been at this for a long time. Assessing the effect of tax and expenditure policies on efficiency, and any potential tradeoffs with distributional goals, has long been an important component of the IMF’s policy advice, particularly in the context of its technical assistance to member countries. Furthermore, the design of Fund-supported programs is inevitably influenced by the authorities’ distributional objectives.
Our concern for the poor in the design of Fund-supported programs has a longstanding history, going back to the 1980s. The 2011 Review of IMF programs—the “Conditionality Review”—indicated that an increasing number of Fund programs are taking into consideration social aspects, and that social spending has largely been safeguarded in programs. In some countries, such as Sierra Leone, and Togo, conditionality on subsidy reform was accompanied by an analysis of its distributional impact, and, in some cases, by conditionality on measures to protect the poor. Income distribution issues also surface during the Fund’s surveillance of member’s economic policies, especially during discussions of the potential effects of tax and expenditure reforms. I should also highlight the other reason why we are focusing on this issue, that is, the pressure on countries to redistribute, as reflected in public surveys. Our members would like to explore with us how they can pursue distributive policies in an efficient manner.
The key message that I want to convey today is that when it comes to fiscal redistribution, design matters. This is consistent with another recent IMF study, which finds that, on average, fiscal redistribution has been associated with higher growth. In our view, there is a diversity of experience across countries with redistributive policies. Some redistributive fiscal policies can help improve efficiency and support growth, such as those that enhance the human capital of low-income households. For other redistributive fiscal policies, a tradeoff between equality and efficiency may be involved. But even when these tradeoffs exist, the appropriate design of policies can help to minimize their adverse effects on incentives to work, save, and invest.
Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management