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Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International Monetary Fund January 2013 This presentation represents the views of the author and should not be attributed to the IMF, its Executive Board, or its management.

Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

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Page 1: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

Global Trends in Public Pension

Spending and Outlook

Benedict Clements

Fiscal Affairs Department

International Monetary Fund January 2013

This presentation represents the views of the author and should not be attributed to the IMF, its Executive Board, or its management.

Page 2: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

Plan of Presentation

2

I. Trends and drivers of public pension spending in

advanced and emerging economies

II. Fiscal context and projected spending increases

III. Risks to projections

IV. Conclusions

Page 3: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

I. Trends and drivers of

public pension spending

3

Page 4: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

4

After rapid increases over 1970-1990, reforms have

slowed the growth of public pension spending

advanced economies

0

2

4

6

8

10

12

14

16

18

1970 1980 1990 2000 2010

Pe

nsio

n S

pen

din

g, p

erc

ent o

f G

DP

Lowest Average Highest

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Note: The average includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,

Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, the United Kingdom, and the United States. The lowest/highest refers to the single country with

the lowest/highest spending.

Page 5: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0.9

0.3

2.0

-0.1

1.5

-0.6

1.1

-0.5

-3

-2

-1

0

1

2

3 A

gin

g

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

1970-1990 (Advanced)

1990-2010 (Advanced)

Co

ntr

ibutio

n to

Sp

en

din

g G

row

th

Evolution of Public Pension Expenditures in Advanced Economies, 1970–2010

(Percent of GDP)

5

Higher replacement rates and aging have

driven spending in advanced economies

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Page 6: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1970 1980 1990 2000 2010

Pensio

n S

pendin

g, perc

ent of G

DP

Australia Japan Korea New Zealand

6

Trends vary across countries

Sources: OECD, ILO, UN, and IMF staff estimates.

Page 7: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0.7

-0.4

0.5

-0.2

4.8

-2.3

2.7

-0.4

-3

-1

1

3

5 A

gin

g

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

1990-2010 (Australia)

1990-2010 (Japan)

Co

ntr

ibutio

n to

Sp

en

din

g G

row

th

Evolution of Public Pension Expenditures in Advanced Asia and Pacific, 1990–2010

(Percent of GDP)

7

Higher replacement rates and aging have

driven spending in advanced economies

Sources: OECD, ILO, UN, and IMF staff estimates.

Page 8: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0.9

-0.1

0.1

-0.1

1.1

-3.8

0.9

-0.8

-4

-2

0

2 A

gin

g

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

1990-2010 (Korea)

1990-2010 (New Zealand)

Co

ntr

ibutio

n to

Sp

en

din

g G

row

th

Evolution of Public Pension Expenditures in Advanced Asia and Pacific, 1990–2010

(Percent of GDP)

8

Higher replacement rates and aging have

driven spending in advanced economies

Sources: OECD, ILO, UN, and IMF staff estimates.

Page 9: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0

2

4

6

8

10

12

1990 2000 2010

Pe

nsio

n S

pen

din

g, p

erc

ent o

f G

DP

Other Emerging

Emerging Europe

Emerging Asia

9

Large increases in pension spending in emerging

economies, but from low level in Asia

Evolution of Public Pension Expenditures in Emerging Economies, 1990–2010

(Percent of GDP)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Note: Emerging Europe includes Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia,

Turkey, and Ukraine. Emerging Asia includes China, India, Indonesia, Malaysia, Pakistan, Philippines, and

Thailand. Other emerging includes Argentina, Brazil, Chile, Colombia, Egypt, Jordan, Mexico, Saudi Arabia,

and South Africa.

Page 10: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

1.8

-1.5

2.1

0.7 1.0

-0.4

0.7

-0.3

0.2 0.0

0.9

0.0

-3

-2

-1

0

1

2

3 A

gin

g

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Repla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

ation

1990-2010 (Emerging Europe)

1990-2010 (Other Emerging)

1990-2010 (Emerging Asia)

Co

ntr

ibu

tio

n to

Sp

en

din

g G

row

th

10

Higher replacement rates and aging have

driven spending in emerging economies

Evolution of Public Pension Expenditures in Emerging Economies, 1990–2010

(Percent of GDP)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Page 11: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

ISL IRL

KOR

NZL SVK USA

AUS

AUT

BEL

CAN

CZE DNK

FIN

FRA GRC

LUX NLD NOR

PRT

SVN ESP SWE

CHE

GBR

GER

ITA

JPN

0

4

8

12

16

20

0 10 20 30 40 50 60 70

Spendin

g (

perc

ent

of

GD

P)

Replacement Rate (percent of average wage)

Advanced

IND IDN

MYS

PAK PHL SAU ZAF

TUR

EGY JOR

ARG

BRA

CHN

CHL

MEX

POL

RUS

THA

BGR

EST HUN

LVA

LTU ROM

UKR

0

4

8

12

16

20

0 10 20 30 40 50 60 70

Spendin

g (

perc

ent

of

GD

P)

Replacement Rate (percent of average wage)

Emerging

0 2 4 6 8 10 12 14 16

-80 120 Old-age dependency ratio=0-10 Old-age dependency ratio=10-20

Old-age dependency ratio=20-30 Old-age dependency ratio=30-40

Pension Spending, Replacement Rates, and Aging, 2010

11

Variation in spending reflects differences in

aging, system generosity, and coverage rates

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Page 12: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

II. Fiscal context and projected spending

increases

12

Page 13: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0

20

40

60

80

100

120

140

1880 1886 1892 1898 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012

Advanced

Emerging

Debt ratios remain at historic levels in

advanced economies

13

Public Debt, percent of GDP

World War II Great

Recession

Source: IMF.

Page 14: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

Substantial adjustment is needed to bring debt

ratios to appropriate levels in advanced economies

14

Illustrative Adjustment Needs, percent of GDP

9.5

-4

0

4

8

12

16

20

Source: IMF.

Page 15: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

0.2

-6

-4

-2

0

2

4

6

8

10

Emerging economies are in a stronger overall

fiscal position, but some countries are vulnerable

15

Illustrative Adjustment Needs, percent of GDP

Source: IMF.

Page 16: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

16

Implications for fiscal policy and pensions

Fiscal adjustment needs are high in many advanced

economies

Measure of needed fiscal adjustment does not take into

account projected increases in pension and public

health spending

Containing increases in pension spending may be

needed to support fiscal adjustment

Emerging economies have more fiscal space

Page 17: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

-2

0

2

4

6

Luxem

bourg

Kore

a

Slo

venia

Belg

ium

Neth

erla

nds

New

Ze

ala

nd

Norw

ay

Sw

itzerla

nd

Fin

land

Canada

United S

tate

s

Germ

any

Austr

ia

Austr

alia

Irela

nd

Port

ugal

Slo

vakia

Spain

Unite

d K

ing

dom

Icela

nd

Gre

ece

Fra

nce

Czech R

epublic

Japan

Denm

ark

Sw

eden

Italy

Average=1.2

-4

-2

0

2

4

6

8

Tu

rkey

Egypt

Chin

a

Jord

an

Russia

Saudi A

rabia

Mala

ysia

Ukra

ine

Rom

ania

Arg

entin

a

Bra

zil

Mexic

o

Latv

ia

Phili

ppin

es

So

uth

Afr

ica

Lithuania

Th

aila

nd

Indonesia

Pakis

tan

India

Bulg

aria

Chile

Pola

nd

Esto

nia

Hun

ga

ry

Average=1.0

Increase in Pension Spending, 2010–2030

(Percent of GDP)

17

Pension spending pressures will intensify in

many countries between 2010 and 2030

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Page 18: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

18

Enacted reforms are expected to help contain impact of

population aging on spending in advanced economies

Evolution of Public Pension Expenditures, 2010–2030

(Percent of GDP)

4.5

-1.3 -1.4

-0.3

3.2

-0.8 -0.1

-0.4

-6

-4

-2

0

2

4

6

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

2010-2030 (Other Advanced)

2010-2030 (Advanced Asia and Pacific)

Co

ntr

ibutio

n to

Sp

en

din

g G

row

th

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Page 19: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

4.1

-1.5 -1.8

-0.3

2.7

-0.4

-1.1

-0.3

1.4

0.0

0.0 0.0

-6

-4

-2

0

2

4

6

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Labor

forc

e

part

icip

atio

n

Ag

ing

Elig

ibili

ty

Re

pla

cem

ent

rate

Lab

or

forc

e

part

icip

atio

n

2010-2030 (Emerging Europe)

2010-2030 (Other Emerging)

2010-2030 (Emerging Asia)

19

Enacted reforms are expected to help contain impact

of population aging on spending in most emerging

regions except for Asia

Evolution of Public Pension Expenditures, 2010–2030

(Percent of GDP)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Page 20: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

20

Demographic and macroeconomic risks

High longevity

(>1 percentage point of GDP in 2030

spending)

Czech Republic, Russia, Slovakia, and

Ukraine

Low productivity

(>0.5 percentage points of GDP in

2030 spending)

Italy, Portugal, and Spain

Labor force participation

(>0.5 percentage points of GDP in

2030 spending)

Czech Republic, Japan, Korea, the

United Kingdom, and the United States

III. Considerable uncertainty and upside risks

to projections

Page 21: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

21

Other risks

Reform reversal

(Reform impact >5 percentage points

of GDP in 2030 spending)

Austria, France, Hungary, Italy, and

Poland

Shortfalls in private DB plans

(DB plans 30 percent or more

underfunded in 2009)

Belgium, Japan, and Sweden

High share in private DC plans

(Pension fund assets >40 percent of

GDP)

Australia, Canada, Denmark, Finland,

Iceland, Ireland, Netherlands,

Switzerland, the United Kingdom, and

the United States

Considerable uncertainty and upside risks to

projections

Page 22: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

22

IV. Conclusions

Public pension spending has increased in advanced

and emerging economies since 1970s

Aging will put pressure on pension spending in coming

decades, with many emerging economies starting from

lower levels

Upside risks to projections and uncertainties

Containing increases in pension spending in advanced

economies may be needed to support fiscal adjustment

Some but not all emerging economies have fiscal space

that could be used to expand pension coverage

Page 23: Global Trends in Public Pension Spending and Outlook · 2013-01-04 · Global Trends in Public Pension Spending and Outlook Benedict Clements Fiscal Affairs Department International

23

Thank you!