Social Protection Department, ILO Pension reforms and pensionable age Trends, considerations and principles ILO Geneva 13-14 September 2016 Anne Drouin, Hiroshi Yamabana, Costas Stavrakis and Andrés Acuna-Ulates Social Protection Department, ILO

Structure of presentation EU trends on social security pension reforms Emphasis on long-term financial sustainability through longer working lives Goal of pension reform Considerations in raising pensionable age and for longer working lives Policy objectives of social security pension systems, including ILO social security standards and principles Demography and labour market conditions Labour demand and supply for the elderly, public mechanism and legislation Reforms for deferring pension take-up in line with life expectancy prolongation Increasing the standard pensionable age Decreasing pension benefits (so workers defer their pension take-up) Increasing service years to qualify for pensions Concluding remarks

Pension reforms in the EU – public pension expenditure ……. Assessing the financial impact of pension reforms Decomposition of public pension expenditure to GDP into four key drivers: Source: 2015 Ageing Report

Pension reforms in the EU – public expenditure All countries mitigate the ageing impact by reducing the coverage and benefit ratios. Changes in public pension expenditure as % of GDP between 2013 and 2055, total and decomposed into main drivers Source: 2015 Ageing Report

Pension reforms in the EU- income replacement rate Most countries decrease the replacement rate of social security pensions. Some countries increase reliance on funded schemes affected by financial markets. Percentage point difference in gross theoretical replacement rates (40-year career) Increase: > 5pp 6 MS Decrease: > 5pp 14 MS Source: 2015 Pensions Adequacy Report

Pension reforms in the EU – income replacement rate Stronger link between contributions and benefits and stricter eligibility conditions. Percentage point difference in net theoretical replacement rates for workers with short career (30 years) and full career (from the age of 25 to the standard pensionable age) Decrease: > 10pp 23 MS Source: 2015 Pensions Adequacy Report

Pension reforms in the EU – Wave #1: from 1990s till the crisis (2008) Parametric reforms Restricting access to early retirement Tying individual benefits closer to contributory records Raising the number of qualifying years for a full pension Equalising pension ages of men and women Introducing automatic balancing mechanisms Non-parametric reforms Expansion of pre-funding component – reserve funds and mandatory private pension provisions Introduction of mandatory defined-contribution funded schemes – replacing a part of Pay-As-You-Go or partially funded defined-benefit schemes

Pension reforms in the EU – Wave #2: after 2008 Halting and reversing the expansion of pre-funding components Difficulty in funding significant transition cost out of public budget “More aggressive” reforms for financial sustainability Increasing pensionable ages in line with life expectancy prolongation Cutting pensions in payment Giving the EU a much larger and more direct role in national pension reforms

Goal of pension reforms Achieving optimal balance between benefit adequacy and financial sustainability Generous pension promises without sound financing mechanisms would never be kept A pension system not meeting social expectations would be undermined by lack of willingness to contribute By duly taking into account: Specific demographic, economic and political context Policy objectives of the national pension system ILO social security standards and principles

Considerations in raising pensionable age – Pension policy - protecting the elderly Coverage of all the elderly Mitigation of the old-age poverty Old-age income protection for the maintenance of decent living standard Inter-generational and intra-generational solidarity and equity through redistribution of income Long-term financial sustainability to be formulated through social dialogue

Considerations in raising pensionable age – ILO social security standards on retirement age and ILO policy on old-age workers Age of retirement Age should be set “with due regard to the working ability of elderly” (C.102) Age should be set “with due regard to demographic, economic and social criteria” (C128) Lower retirement age than 65 for persons in arduous or unhealthy occupations (C128) or when otherwise justified socially Scope to follow an integrated social, economic and fiscal policy approach for older-age workers … Employment policies (to protect from layoff and to stimulate new recruitment/ employment at older working ages) at advanced working ages need to be compatible with pension age legislation. Measures / policies to accounting for income security needs at older ages - the inter-linkages between unemployment, disability and pre-retirement opportunities. Policy impacts should account for the net fiscal considerations taking account of fiscal expenditure and social outcomes together. Source: ILO (2013) Report IV - Employment and Social Protection in the New Demographic Context, International Labour Conference, 102nd Session, ILC.102/IV, Geneva http://www.ilo.ch/ilc/ILCSessions/102/on-the-agenda/employment-social-protection/lang--en/index.htm

Considerations in raising pensionable age - Demography The dependency ratio consists of the ratio between people over certain age and people on working age younger than that age. For example, the dependency ratio for an age of 65 is the number of people aged 65 or more divided by the number of people aged between 15 and 64. The dependency ratio will increase if the number of people aged between 15 and 64 grows less than the number of people aged 65 or more. The idea of raising pensionable age is to move the effective dependency ratio of the scheme towards a lower level: reducing the pressure on the scheme.

Considerations in raising pensionable age - Demography 1980 2015 2050 for males in 2013

Considerations in raising pensionable age - Demography A higher pensionable age means a lower dependency ratio. 1980 2015 2050 for males in 2013

Considerations in raising pensionable age - Demography A higher pensionable age means smaller increases in the ratio. 1980 2015 2050 for males in 2013

Considerations in raising pensionable age - Demography Regions with higher old-age dependency ratios have later retirement ages. 1980 2015 2050 for males in 2013

Considerations in raising pensionable age - Demography Russia is aged than Asia and younger than Europe.

Considerations in raising pensionable age - Labour market conditions The scheme’s dependency ratio depends not only on the general demography, but also on labour market conditions, for example, A higher employment rate reduces the dependency ratio. Mechanical pensionable age increases may create problems, for example, If the labour market does not provide employment opportunities for the elderly, there will be more problems of unemployment and poverty among the elderly.

Considerations in raising pensionable age - Opportunities in labour markets Current (2013) and future (2060) statutory pensionable age in the EU

Considerations in raising pensionable age - Opportunities in labour markets Current (2013) statutory pensionable age compared with effective retirement age in the EU

Considerations in raising pensionable age - Opportunities in labour markets How current effective retirement affects the way countries can modify future statutory pensionable age. Source: 2015 Pensions Adequacy Report

Considerations in raising pensionable age - Opportunities in labour markets

Considerations for longer working lives - Labour market, employment and overall social protection programmes Uninterrupted income through work and social protection Labour market conditions, for example, labour demands and supply (e.g. employability and health conditions of the elderly) and public mechanisms and legislation (e.g. no age discrimination, promotion measures for the elderly to work) for people to work till the increased pensionable age Coordination and consistency between the statutory retirement age in the labour law and the pensionable age Net fiscal efficiency of the overall social protection programmes Coordinated policy among different social protection programmes (e.g. social assistance, unemployment protection, disability benefits, old-age pensions)

Reforms in deferring pension take-up in line with life expectancy prolongation Increasing standard pensionable age Legislated increases of pensionable age Automatic increases through periodic reviews maintain the life expectancy at pensionable age maintain a ratio of a pension period to a working period Adjusting pension benefits in line with life expectancy prolongation Sustainability factors or life expectancy coefficients Introduction of a notional-defined-contribution (NDC) scheme Automatic increase of an annuity conversion factor at pensionable age Increasing qualifying conditions in line with life expectancy prolongation Increasing number of years to qualify for a full pension

Automatic increase of statutory pensionable age Denmark – increase in line with the life expectancy prolongation at age 60 (calculate every 5 years and give 15-year notice in advance) UK – maintain ratio of pension period to working period (review every 5 years) Portugal – increase each year by ⅔ of increase in life expectancy at age 65 measured two years earlier Netherlands – retirement age increased by 3 months each year if increase in cohort life expectancy at 65 is more than 3 months Cyprus – automatic increase every 5 years to maintain life expectancy at statutory retirement age

Automatically pension reduction at award in line with life expectancy prolongation Sustainability factors or life expectancy coefficients Germany: based on changes of old-age dependency ratio Finland: life expectancy coefficient Spain: sustainability factor Notional-defined-contributions (NDC) schemes Sweden, Italy, Poland and Latvia Increased life expectancy is automatically translated into a higher annuity conversion factor of notional account balances to pensions

More Incentives for late retirement Change incentive structures to encourage later retirement France - more demanding contribution requirements Norway – life expectancy coefficient with flexible retirement age

Concluding remarks Balancing adequacy and financial / fiscal sustainability, including raising pensionable age, are always defined nationally as a part of the broader implicit or explicit social contract. Fiscal rules solely cannot overtake social policy objectives. Coordination between employment and social security policies essential so that old-age people should not lose income source and so that overall social protection resources should be efficiently utilized.