Regional Pension Workshop Changing demographics and pension systems Iris Claus and Ron Hackett 25 April 2016 Majuro, Republic of the Marshall Islands

Population trends … vary across the region and over time. International migration Changing demographics Pension systems Pension systems and population ageing … vary across the region and over time. Data source: United Nations Projections assume medium fertility.

More recent trends Population trends International migration Changing demographics Pension systems Pension systems and population ageing The population has been rising in the Republic of the Marshall Islands and Palau. It has been falling in the Federated States of Micronesia. Data source: Secretariat of the Pacific Community

International migration Population trends International migration Changing demographics Pension systems Pension systems and population ageing Inward migration is contributing to population growth in Palau. Outward migration is contributing to a declining population in the Federates States of Micronesia and slower population growth in the Republic of the Marshall Islands. The net migration rate compares the difference between the number of persons entering and leaving a country during the year per 1,000 persons (based on mid-year population).

Changing demographics Population trends International migration Changing demographics Pension systems Pension systems and population ageing Child dependency (number of children aged 0 to 14 divided by working age population, aged 15 to 59, in percent) is falling. Age dependency (number of people aged 60 and older divided by working age population, in percent) is rising. Data source: Secretariat of the Pacific Community

Working age population Population trends International migration Changing demographics Pension systems Pension systems and population ageing … is fairly stable. The decline in child dependency is due to a falling fertility rate (and outward migration). The rise in age dependency is mainly due to increased life expectancy and maybe retired migrants moving back. Data source: Secretariat of the Pacific Community

Median age … is increasing. Population trends International migration Changing demographics Pension systems Pension systems and population ageing … is increasing. Data source: Secretariat of the Pacific Community The median age is the age that divides the population in two parts of equal size, that is, there are as many persons with ages above the median as there are with ages below the median. It is expressed as years.

Population ageing Population trends International migration Changing demographics Pension systems Pension systems and population ageing … is expected to continue with falling fertility rates and rising life expectancy. Data source: United Nations The average number of children a hypothetical cohort of women would have at the end of their reproductive period if they were subject during their whole lives to the fertility rates of a given period and if they were not subject to mortality. It is expressed as children per woman. The average number of years of life expected by a hypothetical cohort of individuals who would be subject during all their lives to the mortality rates of a given period. It is expressed as years. Data are for the Federated States of Micronesia.

Pension systems … can insure against the risk of longevity. Population trends International migration Changing demographics Pension systems Pension systems and population ageing … can insure against the risk of longevity. Without a pension system people (must) save more than with a pension system to avoid outliving their resources. Pension systems are welfare enhancing. With a sustainable pension system people can save less, consume more or work less. The welfare gains of pension systems are lost if pension funds are not (perceived to be) sustainable.

Design of pension systems Population trends International migration Changing demographics Pension systems Pension systems and population ageing There are two categories of pension system: (i) defined contribution and (ii) defined benefit. In a defined contribution system, employers and employees make regular contributions to a pension account. Usually the contributions are a percentage of salary and often are income tax deductible. The pension benefit depends on the accumulated contributions and the total return on the assets in the account. The return is not defined when contributions are made. In a defined benefit system, the pension benefit rather than the contribution is defined according to years of service and, in most cases, the salary level of the employees.

Design of pension systems Population trends International migration Changing demographics Pension systems Pension systems and population ageing By definition, the defined contribution pension system is fully funded. The defined benefit pension system can be further divided into unfunded and funded pension plans. The unfunded defined benefit pension system is commonly called Pay-As-You-Go (PAYG). PAYG systems pay pensions out of current contributions or taxes. In a funded defined benefit pension system, all contributions are invested in a fund, which is invested in a way to meet the future benefit payment needs.

Hybrid pension systems Population trends International migration Changing demographics Pension systems Pension systems and population ageing With a conditional defined benefit system individuals have defined contribution, individual accounts. But they receive a guaranteed minimum amount of benefit. Any short-fall between the minimum amount of benefit and the annuity provided by the defined contribution account is paid by the government. The conditional defined benefit system provides a safety net for lower income earners.

Hybrid pension systems Population trends International migration Changing demographics Pension systems Pension systems and population ageing A notional unfunded defined contribution pension system is a hybrid of the PAYG and the defined contribution pension system. Like the PAYG system, benefits are paid to retirees out of current contributions or taxes. Individual accounts are also set up and employees are credited for contributions to their accounts without any assets actually being deposited. The system is supposed to provide incentives for employees to remain in the workforce longer.

Long-run costs Population trends International migration Changing demographics Pension systems Pension systems and population ageing The long-run cost of a funded pension system is lower than with a PAYG system if the total rate of return on assets is higher than the growth rate of aggregate wages. To provide the same level of benefits less savings deposits are needed with a funded system than taxes are required with a PAYG system.

Pension systems and population ageing Population trends International migration Changing demographics Pension systems Pension systems and population ageing With population ageing the number of working age people per older person is declining. If the eligibility age for pensions does not rise with life expectancy the number of retirees rises faster than the number of people working and contributing to the pension system. To provide the same level of benefit rising life expectancy requires larger current contributions or taxes and / or a higher total rate of return on assets (in funded system).

Pension systems and population ageing Population trends International migration Changing demographics Pension systems Pension systems and population ageing International migration may put pressure on pension systems depending on … portability provisions of pensions in the case of outward migration and … pension eligibility criteria for migrants in the case of inward migration. Declining populations may also affect the rate of return on assets, e.g. real estate.