1. Social Protection Department, ILO
Pension reforms and pensionable age Trends, considerations and principles
ILO Geneva
13-14 September 2016
Anne Drouin, Hiroshi Yamabana, Costas Stavrakis and Andrés Acuna-Ulates
Social Protection Department, ILO

2. Structure of presentation
EU trends on social security pension reforms
Emphasis on long-term financial sustainability through longer working lives
Goal of pension reform
Considerations in raising pensionable age and for longer working lives
Policy objectives of social security pension systems, including ILO social security standards and principles
Demography and labour market conditions
Labour demand and supply for the elderly, public mechanism and legislation
Reforms for deferring pension take-up in line with life expectancy prolongation
Increasing the standard pensionable age
Decreasing pension benefits (so workers defer their pension take-up)
Increasing service years to qualify for pensions
Concluding remarks

3. Pension reforms in the EU – public pension expenditure
……. Assessing the financial impact of pension reforms
Decomposition of public pension expenditure to GDP into four key drivers:
Source: 2015 Ageing Report

4. Pension reforms in the EU – public expenditure
All countries mitigate the ageing impact by reducing the coverage and benefit ratios.
Changes in public pension expenditure as % of GDP between 2013 and 2055, total and decomposed into main drivers
Source: 2015 Ageing Report

5. Pension reforms in the EU- income replacement rate
Most countries decrease the replacement rate of social security pensions.
Some countries increase reliance on funded schemes affected by financial markets.
Percentage point difference in gross theoretical replacement rates (40-year career)
Increase: > 5pp MS
Decrease: > 5pp
14 MS
Source: 2015 Pensions Adequacy Report

6. Pension reforms in the EU – income replacement rate
Stronger link between contributions and benefits and stricter eligibility conditions.
Percentage point difference in net theoretical replacement rates for workers with short career (30 years) and full career (from the age of 25 to the standard pensionable age)
Decrease: > 10pp
23 MS
Source: 2015 Pensions Adequacy Report

7. Pension reforms in the EU – Wave #1: from 1990s till the crisis (2008)
Parametric reforms
Restricting access to early retirement
Tying individual benefits closer to contributory records
Raising the number of qualifying years for a full pension
Equalising pension ages of men and women
Introducing automatic balancing mechanisms
Non-parametric reforms
Expansion of pre-funding component – reserve funds and mandatory private pension provisions
Introduction of mandatory defined-contribution funded schemes – replacing a part of Pay-As-You-Go or partially funded defined-benefit schemes

8. Pension reforms in the EU – Wave #2: after 2008
Halting and reversing the expansion of pre-funding components
Difficulty in funding significant transition cost out of public budget
“More aggressive” reforms for financial sustainability
Increasing pensionable ages in line with life expectancy prolongation
Cutting pensions in payment
Giving the EU a much larger and more direct role in national pension reforms

9. Goal of pension reforms
Achieving optimal balance between benefit adequacy and financial sustainability
Generous pension promises without sound financing mechanisms would never be kept
A pension system not meeting social expectations would be undermined by lack of willingness to contribute
By duly taking into account:
Specific demographic, economic and political context
Policy objectives of the national pension system
ILO social security standards and principles

10. Considerations in raising pensionable age – Pension policy - protecting the elderly
Coverage of all the elderly
Mitigation of the old-age poverty
Old-age income protection for the maintenance of decent living standard
Inter-generational and intra-generational solidarity and equity through redistribution of income
Long-term financial sustainability
to be formulated through social dialogue

11. Considerations in raising pensionable age – ILO social security standards on retirement age and ILO policy on old-age workers
Age of retirement
Age should be set “with due regard to the working ability of elderly” (C.102)
Age should be set “with due regard to demographic, economic and social criteria” (C128)
Lower retirement age than 65 for persons in arduous or unhealthy occupations (C128) or when otherwise justified socially
Scope to follow an integrated social, economic and fiscal policy approach for older-age workers …
Employment policies (to protect from layoff and to stimulate new recruitment/ employment at older working ages) at advanced working ages need to be compatible with pension age legislation.
Measures / policies to accounting for income security needs at older ages the inter-linkages between unemployment, disability and pre-retirement opportunities.
Policy impacts should account for the net fiscal considerations taking account of fiscal expenditure and social outcomes together.
Source: ILO (2013) Report IV - Employment and Social Protection in the New Demographic Context, International Labour Conference, 102nd Session, ILC.102/IV, Geneva

12. Considerations in raising pensionable age - Demography
The dependency ratio consists of the ratio between people over certain age and people on working age younger than that age.
For example, the dependency ratio for an age of 65 is the number of people aged 65 or more divided by the number of people aged between 15 and 64.
The dependency ratio will increase if the number of people aged between 15 and 64 grows less than the number of people aged 65 or more.
The idea of raising pensionable age is to move the effective dependency ratio of the scheme towards a lower level: reducing the pressure on the scheme.

13. Considerations in raising pensionable age - Demography
1980
2015
2050
for males in 2013

14. Considerations in raising pensionable age - Demography
A higher pensionable age means a lower dependency ratio.
1980
2015
2050
for males in 2013

15. Considerations in raising pensionable age - Demography
A higher pensionable age means smaller increases in the ratio.
1980
2015
2050
for males in 2013

16. Considerations in raising pensionable age - Demography
Regions with higher old-age dependency ratios have later retirement ages.
1980
2015
2050
for males in 2013

17. Considerations in raising pensionable age - Demography
Russia is aged than Asia and younger than Europe.

18. Considerations in raising pensionable age - Labour market conditions
The scheme’s dependency ratio depends not only on the general demography, but also on labour market conditions, for example,
A higher employment rate reduces the dependency ratio.
Mechanical pensionable age increases may create problems, for example,
If the labour market does not provide employment opportunities for the elderly, there will be more problems of unemployment and poverty among the elderly.

19. Considerations in raising pensionable age - Opportunities in labour markets
Current (2013) and future (2060) statutory pensionable age in the EU

20. Considerations in raising pensionable age - Opportunities in labour markets
Current (2013) statutory pensionable age compared with effective retirement age in the EU

21. Considerations in raising pensionable age - Opportunities in labour markets
How current effective retirement affects the way countries can modify future statutory pensionable age.
Source: 2015 Pensions Adequacy Report

22. Considerations in raising pensionable age - Opportunities in labour markets

23. Considerations for longer working lives - Labour market, employment and overall social protection programmes
Uninterrupted income through work and social protection
Labour market conditions, for example, labour demands and supply (e.g. employability and health conditions of the elderly) and public mechanisms and legislation (e.g. no age discrimination, promotion measures for the elderly to work) for people to work till the increased pensionable age
Coordination and consistency between the statutory retirement age in the labour law and the pensionable age
Net fiscal efficiency of the overall social protection programmes
Coordinated policy among different social protection programmes (e.g. social assistance, unemployment protection, disability benefits, old-age pensions)

24. Reforms in deferring pension take-up in line with life expectancy prolongation
Increasing standard pensionable age
Legislated increases of pensionable age
Automatic increases through periodic reviews
maintain the life expectancy at pensionable age
maintain a ratio of a pension period to a working period
Adjusting pension benefits in line with life expectancy prolongation
Sustainability factors or life expectancy coefficients
Introduction of a notional-defined-contribution (NDC) scheme
Automatic increase of an annuity conversion factor at pensionable age
Increasing qualifying conditions in line with life expectancy prolongation
Increasing number of years to qualify for a full pension

25. Automatic increase of statutory pensionable age
Denmark – increase in line with the life expectancy prolongation at age 60 (calculate every 5 years and give 15-year notice in advance)
UK – maintain ratio of pension period to working period (review every 5 years)
Portugal – increase each year by ⅔ of increase in life expectancy at age 65 measured two years earlier
Netherlands – retirement age increased by 3 months each year if increase in cohort life expectancy at 65 is more than 3 months
Cyprus – automatic increase every 5 years to maintain life expectancy at statutory retirement age

26. Automatically pension reduction at award in line with life expectancy prolongation
Sustainability factors or life expectancy coefficients
Germany: based on changes of old-age dependency ratio
Finland: life expectancy coefficient
Spain: sustainability factor
Notional-defined-contributions (NDC) schemes
Sweden, Italy, Poland and Latvia
Increased life expectancy is automatically translated into a higher annuity conversion factor of notional account balances to pensions

27. More Incentives for late retirement
Change incentive structures to encourage later retirement
France - more demanding contribution requirements
Norway – life expectancy coefficient with flexible retirement age

28. Concluding remarks
Balancing adequacy and financial / fiscal sustainability, including raising pensionable age, are always defined nationally as a part of the broader implicit or explicit social contract.
Fiscal rules solely cannot overtake social policy objectives.
Coordination between employment and social security policies essential so that old-age people should not lose income source and so that overall social protection resources should be efficiently utilized.