Pension reform as defined ambition
Frank Vandenbroucke University of Amsterdam
Seminar Belgische Petroleum Federatie - Fédération Pétrolière Belge
Brussels, 30 March 2017
Resources
• European Commission, The 2015 Ageing Report, European Economy 3/2015
• Belgian Commission on Pension Reform 2020-2040 • www.pensioen2040.belgie.be • www.pension2040.belgique.be
• Schokkaert, Devolder, Hindriks, Vandenbroucke, Towards an equitable and sustainable points system. A proposal for pension reform in Belgium, Discussion Paper Series 17.03 Department of Economics, KULeuven, February 2017.
• Hindriks, Devolder, Schokkaert, Vandenbroucke, Réforme des pensions légales: le système de pension à points, Regards Economiques, numéro 130, Mars 2017.
• Schokkaert, Devolder, Hindriks, Vandenbroucke, Het pensioen op punten: naar een nieuw sociaal contract tussen jongeren en ouderen, Leuvense Economische Standpunten (forthcoming)
Dependency and demographic change in the EU
14
16
18
20
22
24
26
28
0
20
40
60
80
100
120
140
160
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Life
exp
ecta
ncy
at 6
5
Depe
nden
cy (
old
age
& t
otal
eco
nom
ic)
Old age dependency ratio, EU Total economic dependency, EU Life expectancy at 65, EU
Old age dependency ratio in Belgium [65+]/[20-64]
2010
2040 2060
000
000
000
000
000
001
001
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
2055
2058
Belgium Belgium with constant life expectancy
Old age dependency ratio in Belgium [65+]/[20-64]
2010
2040 2060
000
000
000
000
000
001
001
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
2055
2058
Belgium Belgium with constant life expectancy
Postwar baby-boom: certainty Long-term impact migration & longevity: uncertainty
Dependency and demographic change in the EU
14
16
18
20
22
24
26
28
0
20
40
60
80
100
120
140
160
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Life
exp
ecta
ncy
at 6
5
Depe
nden
cy (
old
age
& t
otal
eco
nom
ic)
Old age dependency ratio, EU Total economic dependency, EU Life expectancy at 65, EU
Increasing uncertainty
02468
101214161820
2013 2020 2025 2030 2035 2040 2045 2050 2055 2060
Impact of dependency (no change in coverage, benefit ratio, labour market ratio)
actual forecast (incl. interaction)
Public pension spending, % GDP, EU
02468
101214161820
2013 2020 2025 2030 2035 2040 2045 2050 2055 2060
Impact of dependency (no change in coverage, benefit ratio, labour market ratio)
actual forecast (incl. interaction)
Public pension spending, % GDP, EU
Coverage: (pensioners)/(population 65+) Labour market: employment (=> GDP) Benefit ratio: (average public pension)/(average wage)
02468
101214161820
2013 2020 2025 2030 2035 2040 2045 2050 2055 2060Impact of dependency (no change in coverage, benefit ratio, labour market ratio)
with impact of change in coverage
with impact of change in coverage + labour market ratio
with impact change in coverage, labour market ratio + benefit ratio
actual forecast (incl. interaction)
Public pensions spending, % GDP, EU - decomposed
coverage
labour market
benefit ratio
30
35
40
45
50
55
60
65
70
0
2
4
6
8
10
12
14
16
2013 2020 2025 2030 2035 2040 2045 2050 2055 2060
Public pensions in %GDP, Belgium
Public pensions in %GDP, EU
EU average conceals diversity: pension spending
30
35
40
45
50
55
60
65
70
0
2
4
6
8
10
12
14
16
2013 2020 2025 2030 2035 2040 2045 2050 2055 2060
Public pensions in %GDP, Belgium
Public pensions in %GDP, EU
Public pensions in %GDP, BR2013, Belgium
Public pensions in %GDP, BR2013, EU
Benefit ratio Belgium
Benefit ratio EU
EU average conceals diversity: pension benefit ratio
Change in public pension benefit ratios, 2013 to 2060
BE
BG
CZ
DK DE
EE
IE
EL
ES FR
HR
IT
CY
LV
LT
LU
HU
MT
NL AT
PL
PT
RO
SI SK
FI
SE
UK NO
10
20
30
40
50
60
70
10 20 30 40 50 60 70
Bene
fit ra
tio 2
060
Benefit ratio 2013
No change
Change in pension benefit ratios, including private pensions
BE
BG
CZ
DK DE
EE
IE
EL
ES FR
HR
IT
CY
LV
LT
LU
HU
MT
NL AT
PL
PT
RO
SI SK
FI
SE
UK NO
dk
ee
lv
lt
nl
pl
pt
ro
se
10
20
30
40
50
60
70
10 20 30 40 50 60 70
Bene
fit ra
tio 2
060
Benefit ratio 2013
No change Benefit ratio all pensions
Intergenerational risk sharing: the social contract
• Pensions = managing uncertainty – by integrating adjustment mechanisms in the pension system – EU Commission: by indexing parameters of pension systems to
longevity (e.g. career requirements & retirement age)
• Options for risk sharing
– Conditional on macro demographic & economic context – Conditional on individual choice
Defined benefit Defined contribution
Musgrave rule
Fix… Pension Contribution rate (net) pension benefit ratio
Economic risk Risk for workers Shared risk Shared risk
Demographic risk Risk for workers Risk for retirees Shared risk
Intergenerational risk sharing: the social contract
• Pensions = managing uncertainty – by integrating adjustment mechanisms in the pension system – EU Commission: by indexing parameters of pension systems to
longevity (e.g. career requirements & retirement age)
• ‘Conditional certainty’ for the individual citizen
– Stabilize 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑛𝑛𝑎𝑎𝑛𝑛 𝑝𝑝𝑎𝑎𝑛𝑛𝑝𝑝𝑝𝑝𝑝𝑝𝑛𝑛 𝑝𝑝𝑛𝑛𝑖𝑖𝑝𝑝𝑖𝑖𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑛𝑛𝑎𝑎𝑛𝑛 𝑝𝑝𝑛𝑛𝑖𝑖𝑝𝑝𝑖𝑖𝑎𝑎 𝑎𝑎𝑖𝑖𝑛𝑛𝑝𝑝𝑎𝑎𝑎𝑎 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑎𝑎𝑛𝑛𝑝𝑝𝑝𝑝𝑛𝑛
(Musgrave Rule)
– Conditional on macro demographic & economic context – Conditional on individual choice
Pay-as-you-go allows ‘defined ambition’, with point system
• Pension = (number of points) x (value of point) x (actuarial corrections) x (indexation to income growth)
• Number of points <= career
• Value of point ≈ f (average income employed)
Premised on a desirable and sustainable replacement rate for a ‘standard worker’ with a ‘normal career’; ‘normal career’ takes into account changes in demography etc.
• Positive / negative corrections ≈ f (career)
• Indexation ≈ f (growth real incomes), with flexibility
Pay-as-you-go allows ‘defined ambition’, with point system
• Pension = (number of points) x (value of point) x (actuarial corrections) x (indexation to income growth)
• Number of points <= career
• Value of point ≈ f (average income employed)
Premised on a desirable and sustainable replacement rate for a ‘standard worker’ with a ‘normal career’; ‘normal career’ takes into account changes in demography etc.
• Positive / negative corrections ≈ f (career)
• Indexation ≈ f (growth real incomes), with flexibility
Pay-as-you-go allows ‘defined ambition’, with point system
• Pension = (number of points) x (value of point) x (actuarial corrections) x (indexation to income growth)
• Number of points <= career
• Value of point ≈ f (average income employed)
Premised on a desirable and sustainable replacement rate for a ‘standard worker’ with a ‘normal career’; ‘normal career’ takes into account changes in demography etc.
• Positive / negative corrections ≈ f (career)
• Indexation ≈ f (growth real incomes), with flexibility
Pay-as-you-go allows ‘defined ambition’, with point system
• Pension = (number of points) x (value of point) x (actuarial corrections) x (indexation to income growth)
• Number of points <= career
• Value of point ≈ f (average income employed)
Premised on a desirable and sustainable replacement rate for a ‘standard worker’ with a ‘normal career’; ‘normal career’ takes into account changes in demography etc.
• Positive / negative corrections ≈ f (career), given social stratification of age of entry and healthy life yearsty
Pay-as-you-go allows ‘defined ambition’, with point system
• Pension = (number of points) x (value of point) x (actuarial corrections) x (indexation to income growth)
• Number of points <= career
• Value of point ≈ f (average income employed)
Premised on a desirable and sustainable replacement rate for a ‘standard worker’ with a ‘normal career’; ‘normal career’ takes into account changes in demography etc.
• Positive / negative corrections ≈ f (career)
• Indexation ≈ f (growth real incomes), with flexibility
‘Defined ambition’ : in between DC and DB
Two objectives: • Target replacement rate for ‘standard worker’ with ‘normal
career’
& stabilisation of income ratio pensioners/employed
• Stabilisation of the contribution rates on earned income
⇒ Postponing retirement
⇒ ‘Alternative’ funding (tax shift)
‘Defined ambition’ : in between DC and DB
Two objectives: • Target replacement rate for ‘standard worker’ with ‘normal
career’
& stabilisation of average income ratios pensioners/employed
• Stabilisation of the contribution rates on earned income
⇒ Postponing retirement (flexibility in pension system, but !)
⇒ ‘Alternative’ funding (tax shift)
Funded pensions in a supplementary second pillar
• Why funding? => diversification of risk
• Law on Supplementary Pensions, 2003 – ‘Democratization’ of supplementary pensions – Sector approach: coverage of SME – Embedded in social dialogue – Mobility – Guaranteed minimal return
Sustainable reform…
• Requires large consensus
• Based on sense of common purpose: defined ambition
www.frankvandenbroucke.uva.nl