Equity Analysis for Pensions (Social Insurance) Anita M. Schwarz ECSHD May 2006

Objectives of a Pension System Reduce poverty among the elderly Smooth consumption between working years and retirement years –Implication: those who earn and consume more in working years will consume and earn more in retirement years –Very different from other public expenditure programs which ideally would be designed to allocate equal or greater share of expenditures to the poor

Example from OECD countries, Pensions at a Glance

Pensions at a Glance

Pensions Based on Contributions Coverage limited to those who pay; benefits based on level and duration of contributions Less than 50% of the labor force is paying contributions – likelihood of paying goes up with income Unsurprisingly, expenditures go to higher income groups

Important Redistributions Nonetheless Redistribution from those outside the system to those within when there are fiscal deficits Redistribution across generations – younger cohorts pay more with aging of the population Redistribution within covered cohort –Progressive benefit formula –Minimum pension

Fiscal Sustainability

Someone has to pay the future pensioners –Either paid from outside the system –Partial default due to rules change Redistribution from outside the system to within Intergenerational equity

Equity within a Cohort

Sometimes Need to Look Beyond Pension System for Intracohort Equity Sometimes means-tested pension benefits available in addition to contributory Sometimes basic benefits available to all Sometime pensioners eligible for same social assistance as other age groups

Tools PROST model: –Fiscal analysis  SR and LR sustainability  Implicit pension debt –Individual level social analysis  Vary starting age, retirement age, starting wage, wage growth, work history, and mortality experience  Pensions as percentage of economy wide wage  Pensions as percentage of own final salary  Internal rate of return provided by pension system