1. Reforming pension systems – opportunities and obstacles
Workshop in Malmö
17th of Nov. 2009
Agneta Kruse
Department of Economics,
Lund University

2. Background: Most countries in the industrialised world:
Pay-as-you-go systems, i.e. today’s contributions are used for the contemporary pensioners’ benefits
Pensions are life-cycle savings where the insurance part is an insurance against an extra-ordinary long life.

3. How to organise? Public Private Obligatory Voluntary
Basic Supplementary
Selective General
Pay-as-you-go Funded
Redistributive Actuarial
- within a generation
- between generations
Defined-benefit, DB Defined-contribution, DC
Indexing contributions and/or benefits by
Growth, prices, interest in the capital market
Pay-as-you-go Funded

4. Pay-as-you-go system [vs. a funded one]
Today’s working generation pays contributions which are used for paying today’s pensioners’ pensions.
An (implicit) social contract between generations.
q w L = b R
where q contribution rate, w wage, L labour force, b pension benefit and R number of pensioners.
Left hand side: Sum of contributions; Right hand side: Sum of benefits

5. q = b/w R/L
i.e. the contribution rate has to equal the replacement rate times the dependency ratio.
It is (intuitively) obvious that indexing is by the growth rate in the wage sum.

6. Challenges to pay-as- you-go pension systems
Demographic ageing; fertility, mortality,
working years/hours
Economic growth rate: productivity,
the functioning of labour
market
• Political expansion beyond the
optimal level

7. Challenges to funded systems
Demographic ??
Economic rate of return in the
capital market
● Political non-efficient use of
funds

8. Ageing: reduced fertility, increased longevity … R/L ↑
R/L ↑ means that q has to be increased or b (b/w) decreased:
q w L = b R; q = b/w R/L
Most systems are defined-benefit; → the ”burden” of ageing falls on the working generation.

9. The contribution rate at different combinations of b/w and R/L:
0.33* **
b/w
*) corresponds to a life with 45 working years (20-64) and 15 years as a pensioner (65-80)
**) close to prognoses for Italy and Spain in 2050.

10. The demographic dependency ratio (65+/15-64) for a selection of countries: (Source: UN, World Pop. Prospects)
2010
2050
Czech republic 22 48
France 26 47
Germany 31 59
Italy 25 62
Poland 19 52
Spain
Sweden 28 41 UK 38

11. Ageing (+ reduction in growth prospectives):
make the public pay-as-you-go systems unsustainable:
Reform proposals and activities …
…. easier said than done!
Vested interests from politicians, pensioners’s organisations and labour unions (?)

12. Reform resistance:
Results from economic theory as well as empirical findings show that
pay-as-you-go systems expand beyond the optimal level
Ageing increases the tendency of expansion
The median voter becomes older!

13. … nevertheless: a number of reforms
Major reforms, paradigm shifts (NDC): Italy, Lithuania, Poland, Sweden …
Parameter changes (calculation methods, indexation, pension age): France, Germany, Hungary, Portugal …

14. The Swedish reform as an example
From unsustainable and unfair DB payg to a NDC, financially stable without perverse redistribution
Transition rules for those born between 1938 and 1953.
Demographic strain reduced by work incentives and life expectancy in the benefit formula.

15. 1980s: A parliamentary commission + social partners: good investigation; no changes!
1990s: Small working group of politicians from all parties. No social partners.
Awareness of the system’s unsustainability. Economic crises.

16. Reform options Path dependency …
Honouring the social contract … (even it the contract means taxing still not born?) Transition rules.
Incentives? Delayed retirement, increased working hours?
Fairness (redistribution?).

17. Fairness within a generation;
outcome for men and women; socio- economic groups:
Benefit level
Replacement rate
Rate of return

18. Fairness between generations?
Indexing with growth / wages means that co-living generations share the fruits of good years and the burden of lean years
But – of course – reduced labour supply reduces the growth rate ….