1. Raising Effective Retirement Ages: Impact and Design Issues 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. Some Conceptual Clarifications
Retirement from a particular job ≠ retirement from the labor market (particularly important from a disability perspective)
Retirement from the labor market ≠ retirement into the pension system
What matters is not life expectancy at birth but at retirement age
Retirement age increases must compensate not only for longevity improvements but longer education, too
Nominal retirement age is material only to the extent of explaining effective retirement age

3. Retirement age: major LM policy instrument
Reasons for retiring from labor market

4. Effective Retirement Ages

5. Design Issues Uniformity Extent of flexibility
Women live longer
Women have shorter formal sector work histories and lower wages
Occupational differentiation
Extent of flexibility
Minima and maxima
Treatment of early and deferred retirement
Lead time and pace of increase
Expectations, career strategies >> typically no less than 3 years lead time
Lead time >> announcement effect
Pace of increase: typically no faster than 6 month per year equivalent

6. Emerging Trends and Practices
Differentiated >> Uniform
Rising to at least 65/65 but often to 67/67 with 70/70 already legislated in cases
Lead time: 5 years but occasionally up to 10 years (depending on fiscal urgency and the forgone increases)
Pace: between 3 month/year up to 6 months/per year
Automatic increases
Constant life expectancy at retirement (after increase)
Constant ration of working life to non-working periods
Flexibility with actuarially neutral deferment bonuses and stricter early retirement deductions (with retirement subject to minimum benefit threshold)

7. Some examples Australia 65 to 67 for age pension 2009 Azerbaijan
Belgium
Tightening early retirement
2010
Bolivia
65 to 58 (!)
Brunei
55 to 60
Bulgaria
63/60 to 65/63
2012
Canada
Cuba
60/55 to 65/60
2008
Curacao
60 to 65
2013
Czech Republic
to 65
Denmark
Early retirement conditions tightened
Egypt
Estonia
France
Greece
60 to 65 for women
Guatemala
60 to 62
2011
Hungary
62 to 65
India
65 to 60 (!) for noncontributory means tested scheme (Indira Gandhi)
Ireland
65 to 68
Italy
60 to 65 for public sector, 63 to 65 for women in private sector
Automatic increases with LE.
Kazakhstan
5 8to 63 for women
Latvia
Lithuania
62.5 to 65
Netherlands
65 to 66 in basic, with deductions/increments for early/deferred retirement
Norway
Poland
65/60 to 67
Slovenia
Service time dependent Ras go up by 2 years, on average
South Africa
from 65/60 to 60/60 in the Old Age Grant
Spain
65 to 67 for age pension, tighter early retirment conditions
Turkey
60/58 to 65/65
Ukraine
from 55 to 60 for women UK
60 to 66 for state pensions

8. PEGDP = ODR * (1/PR) * RR * WGDP *ER
Fiscal Impact
PEGDP = ODR * (1/PR) * RR * WGDP *ER
Fiscal impact can be estimated by the change in the eligibility ratio: pensioners/population over 65 (or the cut-off used in the other indicators)
This is a ceteris paribus overestimation of the fiscal impact:
Longer careers will lead to higher pensions (even if the increase is not actuarially fair)
Some people will be unable to work longer >> other forms of transfers will reduce the reform’s net fiscal yield

9. Welfare and Equity Impact
Welfare impact ambiguous
Longer working careers >> higher monthly pensions (typically)
Shorter withdrawal period >> lower total benefit
Welfare impact is heterogeneous
Equity impact
Intergenerational equity improves
Constant labour demand hypotheses is wrong on the longer run(lump of labor fallacy) but…
… labor markets take time to adjust and
… there are circumstances where there may be crowding-out (homogenous, low-tech sectors/economies)
Intra-generational vertical equity may worsen
Better-off pensioners may benefit more, ceteris paribus
Low-skilled, low-paid workers have lower pensions
> they need longer careers but…
>… they tend to die younger,
>… their skills become obsolete faster

10. 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