INTERNATIONAL PENSION RESEARCH INSTITUTE10TH INTERNATIONAL PENSION SEMINAR

TOKYO, 22 NOVEMBER 2005

PUBLIC PENSION REFORMWHY? HOW?

W. R. McGillivrayPolicy Associate

Caledon Institute of Social Policy

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POST WAR SOCIAL SECURITYIN INDUSTRIALIZED COUNTRIES

1945-70 – expansion• during period of recovery/economic growth• ILO Convention 103

•long-/short-term benefits

1970-90 – consolidation• during period of slower economic growth

1990 on – reforms due to• demography• unsustainability

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PUBLIC PENSION SCHEMES

Objective: Provision of adequate income for a retired person and his/her dependants which is affordable, sustainable and sufficiently robust to withstand potential economic or demographic shocks.

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PUBLIC PENSION SCHEMES

Pensions are transfers of resources from active workers to inactive retired persons at the times pensions are paid.

Key to financing pensions is economic growth

Long term perspective necessary

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SOCIAL SECURITY REFORM ISSUES

• governments • have implicit/explicit social security obligations• must ensure proper governance of schemes

• participants’ obligations

• social security schemes transfer resources→ political issue

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SOCIAL SECURITY REFORM ISSUES(CONTINUED)

• take into account all social protection programmes and their interactions (including schemes covering public servants)

• governments can change schemes→ winners/losers

• social security = component of market economy→ globalization challenges→ productivity implications

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WHY REFORM?

1. to ensure schemes’ objectives are met• income replacement throughout retirement• poverty avoidance• income maintenance for disabled persons

and survivors

2. to remove abuses which:• increase the cost of the schemes• have undesirable labour market/social

implications

3. to ensure the scheme’s sustainability

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THE REFORM PROCESS

• proposals• dissemination• promotion• discussion• adoption• implementation

Risks:• reform deadlock• complicated reforms

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PENSION SCHEME REFORM

• DB schemes have long term obligations→ ratio annual expenditures ↑ for many years

annual earnings

• government guarantees DB scheme

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PENSION SCHEME REFORM

• types of DB pension scheme reform:

• parametric (changing DB scheme)• structural (replacing DB scheme)

• results of a pension scheme reform are long delayed, hence:

→ opportunities for obfuscation→ winners/losers are less obvious

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PARAMETRIC REFORMSThree basic possibilities:

1. increasing the contribution rate

2. cutting pensions, e.g. by:• reducing benefit accrual rate• reducing cost of living adjustments

3. reducing the number of pensioners, e.g. by:• increasing retirement age• modifying conditions for receiving

a pension

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INCREASING RETIREMENT AGE

• great potential for reducing pension cost

• Japanese expectation of life at age 65

Year Males Females1960 14.8 17.82000 17.5 22.42050 (est) 21.3 28.6

→ retirement periods are becoming longer

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INCREASING RETIREMENT AGE(CONTINUED)

→ working lifetimes can be increased (provided jobs are available)

• retirement age increases must be implemented gradually

• contracting labour force may requirelater retirement age in order to maintain living standards

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EXAMPLES OF PARAMETRIC REFORMS

Increasecontrib. Cut Reduce no.rate pensions pensioners

Canada X X

Germany X X

Japan X X X

USA X

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STRUCTURAL REFORMS

• generally adaptations of ‘Chilean model’ - privately managed individual accounts DC schemes

•effect of reform cannot be known for many years

•governments are wary since under DC schemes:• individuals bear investment risk• replacement rate is uncertain

and governments will be held responsible if the income of their aged populations is inadequate

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SOCIAL SECURITY REFORMSCONCLUDING OBSERVATIONS

• reforms are necessary to take into account social, economic and demographic conditions• reform focus has been on sustainability; but must also pay attention to benefit adequacy/equity• possibility of parametric reforms is a strength of DB pension schemes• social consensus on reform is necessary• social security beneficiaries have sharedin improved living standards; they mustalso share in potential declines in livingstandards

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