europe by zhangyun


									The European Pension Crisis

        Estelle James
              Two Europes
• First Europe has been unable to come to
  grips with the pension crisis (France,
  Belgium, Germany, Austria, Spain)--
  PAYG, unsustainable benefits, large IPD
• Second Europe has mandatory pre-funding
  with private management + modest public
  safety net (UK, Switzerland, Denmark,
  Netherlands, Sweden, Poland, Hungary)
• We can learn what to avoid from first Europe
  and where to go from second Europe
          Basic demographics
• Populations old now, baby boomers retire
  over next 20 years, increased longevity
• Support ratio (age 20-59/>60) will halve,
  <2, everywhere. But policies will determine
  impact of demographics. 2000         2030
  –   France               2.7        1.6
  –   Germany              2.5        1.2
  –   Switzerland          2.9        1.3
  –   US                   3.4        1.7
  –   Unwtd. Av.           2.8        1.5
    Characteristics of pension plans
            in first Europe
• Generous replacement rates > 60%
• Early retirement (< age 60)
• Mandatory plan is 100% PAYG
• Therefore high % of GDP & treasury spent
  on pensions and health--may be inflationary
  or crowd out other important public spending
• High IPD--above EU criteria if explicit
• Contribution rate > 25% in most countries, >
  30% in some; will have to double in next 30
  years if no changes--nonsustainable
Relationship Between Percentage of the Population
 over 60 Years Old and Public Pension Spending
  Pension spending as
  percentage of GDP
                                                 Poland                Austria
                                                          Luxembourg    Greece
                                                              France               Sweden
                                                          Uruguay           U.K.

                Panama                                 U.S.
  4            Costa Rica                                      Japan
                                       Israel     Australia
          5                  10                   15                   20
                         Percentage of population over 60 years old
           Public Health and Pension Spending
                 versus Population Aging
 Spending as a percentage of GDP
                                                                    Czechoslovakia                 Sweden

                                                   New Zealand
                                                     Iceland                         Switzerland
10           Spending on health and pension                                Japan
                         Brazil    Trinidad &
                                   Tobago                      Cyprus
                                         China                          Spending on health
         Swaziland                       Jamaica
                              S. Korea
 0                           Indonesia
     0               5                     10                  15                    20                 25

                                   Percentage of population over 60 years old
   Implicit Public Pension Debt, 1990
                         Explicit debt
     Canada                       Implicit public pension debt





United States

                0   50     100           150     200         250   300
Reliance on PAYG in first Europe
• Public plans are generous and fully PAYG--
  big burden on future generations, threatens
  future fiscal stability, strength of euro
• Few private plans and those that exist aren’t
  funded (PAYG in France, book reserves
  Germany)--how will companies pay these
  future debts in competitive market?
• Lack of funded private plans means few
  institutional investors, weak financial
  markets and corporate governance
• But difficult to shift to pre-funding while
  paying off high IPD
 Early retirement in first Europe
• Labor force participation rates of men over
  age 55 has been falling rapidly:
  – age 59: < 50% in Belgium, France, Italy
  – 60-64: < 20% (>50% in US)
• DB plans, early retirement not penalized on
  actuarially fair basis, drain on common pool
• Bad for system: more expense, less revenue
• Bad for economy: less experienced labor
• Considered antidote to unemployment but
  may raise labor costs and unemployment
• But politically very difficult to raise
  retirement age--shift to DC would help
• Large public plans are not redistributive to
  poor--may pay higher lifetime benefits to
  high earners
• Biggest gainers were those who retired in
  past. Future retirees will get low rate of
  return due to high contribution rate, high
  dependency rate, uncertain benefits--losing
  faith in system.
First Europe will have to change
• Will have to increase funding, shift to
  partial DC, raise retirement age
• But difficult politically, very slow
• In 1990’s rate of growth half that in US,
  unemployment double that in US
• Postponing increases problems--security for
  pensioners, wage growth and employment
  for workers
   Second Europe: the way forward
• (1) UK, Switzerland, Denmark, Netherlands
  (2) Sweden, Poland, Hungary--more recent
• These countries have modest public PAYB
  pillars--redistributive: flat or compressed in (1),
  earnings-related with minimum in (2)
• + (quasi) mandatory funded private 2d pillar
   – group plan with investment manager chosen by
     employer and/or union in (1)--historical reasons;
   – but movement toward individual accounts in
     some cases (UK, Switzerland)
   – individual accounts with worker choice in (2)
• Lower projected public expenditures, IPD,
  contribution rates; higher retirement ages
• Large build up of pension assets committed
  for the long term; institutional investors,
  corporate governance, financial instruments
• More secure pensions, healthier economies
• Protection for lower income groups
• If improves use of capital and labor, expands
  size of pie, all generations can gain
Comparisons: unemployment rates
        • Non-reformers                 Reformers
            – 1994-97                      1994-97
•   Austria     5.3             Australia                  8.4
•   Belgium 9.0                 Denmark                    5.4
•   France     12.3             Netherlands                5.5
•   Germany 9.8                 Switzerland                4.1
•   Spain      20.6             UK                         7.1
• Average 11.4%                         6.1%
• UnE rate of non-reformers was almost double
  that of reformers

• Source: World Bank, World Development Indicators, 2000
      Comparisons: average annual
             growth rates
        • Non-reformers                      Reformers
        • 1980-90 1990-8                    1980-90 1990-8
•   Austria    2.2  1.9         Australia     3.4 3.8
•   Belgium 1.9     1.6         Denmark       2.3 2.9
•   France     2.3  1.5         Netherlands   2.3 2.6
•   Germany 2.2     1.5         Switzerland   2.0 0.4
•   Spain      3.0  1.9         UK            3.2 2.9
• Average 2.3% 1.7%               2.6% 2.5%
• Non-reformers declined, reformers forged
  ahead in 1990’s
• Source: World Bank, World Development Indicators, 2000
   What do these tables tell us?
• Of course many policies besides pensions
  are at work
• But pro-market, pro-competition, pro-
  efficiency policies seem to pay off--lower
  unemployment, higher growth
• Social security reform with pre-funding and
  private control of the funds is an important
  part of that policy package
          Lessons for the US?
• We can avoid problems of first Europe and
  learn from second Europe
• The US already has a modest public pillar,
  voluntary private plans
• But our public benefit is not sustainable; and
  our private plans mainly cover upper 40%
• We can reform system while problem is still
  manageable, and benefit economy at same
  time (long term savings, later retirement)--
  this will keep retirement income secure, help
  economic growth, potential gains for all

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