PENSIONS

Australia has two explicit pension pillars, the public age pension system and private employment-related pensions. Funded through general taxation revenue, the age pension is means-tested and is therefore effective as a social safety net designed to reduce poverty. Currently, the age pension is still the dominant source of income for retirees, but over time the balance will shift to the private pension system, which was only introduced on a wide scale in 1992, and has only had the current minimum 9% contribution rate since 2002. As a result, most retirees in the medium term future will only have been making significant contributions to their personal retirement accounts for part of their working lives.

The aging population has increased the anticipated pressures on the public age pension system. Responding to these pressures, the government indicated in its 2009 – 2010 budget that it would progressively increase the age of eligibility for the pension from 65 to 67 years by July 2023. The means-tested element of the age pension was also tightened for unearned income, but for employment earnings, this was relaxed to encourage employment participation of retirees. In order to address concerns regarding overall pension adequacy, the government increased the pension rate. The rate for single pensioners was increased even more, from 25% to 27.7% of average male earnings. A new pensioner cost of living index was also announced to preserve the real value of the age pension. In effect, these changes gave more money to fewer people, thus simultaneously enhancing the financial sustainability of the age pension while simultaneously improving its ability to prevent poverty. A further measure, announced in May 2010 as part of the government’s response to the Henry Tax Review, was the gradual increase in the minimum rate of pension contribution to 12% of gross earnings, scheduled to begin in 2012. This will likewise help improve future retirees’ incomes in retirement and the fiscal sustainability of the public pension. However, there is still some uncertainty about whether the proposed change will come into effect, and concerns have also been raised about potential adverse effects on low-wage employment.

The basic components of Canada’s public pension retirement income system are the demogrant Old Age Security (OAS) and Guaranteed Income Supplement (GIS) and the contribution-fed, earnings-based Canada/Quebec Pension Plan (CPP/QPP). The expansion of these programs has resulted in a massive decline in the poverty rate for persons 65 and over in Canada. This rate fell from 21.4% in 1980 to 4.8% in 2007 (the most recent year for which data are available), based on after-tax Low-Income Cut Off (LICO) rates, a measure related to the proportion of a family’s income expended for basic necessities .
The CPP is currently considered to be actuarially sound and fiscally sustainable at its current rate and benefit structure, due to large increases in contribution rates implemented in the late 1990s (Little, 2008). The fiscal sustainability of the OAS/GIS is tied to the sustainability of the federal government’s overall fiscal balance, and is fostered by the indexation of benefits to the CPI rather than to nominal wage increases. With productivity growth, the latter will tend to exceed the former, so CPI indexation gives the CPP (and also OAS/GIS) an extra degree of freedom.
One weakness of the CPP is that it only covers earnings up to 25% of the average wage. This means that middle-income workers with no employer pension plan or private savings may encounter problems in replacing a sufficient proportion of their pre-retirement earnings. The minister of finance has recently launched a public process of consultation on the pension issue. Proposals include both the voluntary and compulsory expansion of the CPP in terms of the proportion of earnings covered.

Pension policy in Denmark is well-diversified across the three pillars, according to the World Bank classification:
(1) Public pensions are considered a basic part of the welfare state; the base pension is universal in the sense that it is only age-dependent. However, a full pension requires residency for 40 years, with the pension age set at 65; what’s more, there is a labor income limit. In addition to a base pension, there are means-tested supplements.
In addition there are age-specific subsidies (e.g., for transport) as well as a specific scheme for rent subsidies for the elderly.
(2) Labor market pensions made their mark on Danish society during the late 1980s and early 1990s. These pension schemes are negotiated in the labor market but are mandatory for the individual. The contribution is split between employers (2/3) and employees (1/3). The contribution rate has been increased over the years and is now 10.8% for most employees. However, since these pension funds are relatively new, few have contributed at high rate during their whole working career. In addition, there are supplementary labor market pensions from pension funds ATP and LD Pensions. The former is mandatory and redistributive, in the sense that contributions depend on income but are based only on working years. The LD Pension is a “frozen” wage increase from the 1970s that has since been transformed into a pension right.

(3) While most citizens are covered by pensions from pillars one and two, there is still a large group (roughly 1/3) who collect private pensions through financial institutions on top of their public pension. Since this is related to labor market performance, there is a gender difference both due to a slightly lower labor force participation for women and a lower level of income. Pension savings are tax subsidized. Contributions are deductable in taxable income, while pensions are taxable income. However, for most the tax rate that applies to the deduction when working is higher than the one applying when not working as a pensioner, due to progressive elements in taxation, and hence the subsidy. The tax principle causes problems in relation to portability when, for example, Danish pensioners decide to move to another country.
In addition to the public pension scheme, the early retirement scheme is important. It allows retirement at the age of 60 and offers a benefit until the statutory pension age of 65.The scheme is voluntary and contribution-based, but it is highly subsidized. The scheme was introduced in 1979 as a labor market initiative to cope with youth unemployment, but has since then become an integral part of the welfare package. The scheme has been reformed a number of times and now includes incentives to delay retirement until the age 62.
While the labor force participation in general is high in Denmark even for citizens aged 50 to 55, it is low for those aged 60 to 65, which reflects the effects of the early-retirement scheme. The scheme is much debated and politically controversial.
The problems of an aging population are also affecting Denmark. The financial consequences of increasing longevity are large, and have been at the core of policy debates for some years. A so-called welfare reform was approved with broad parliamentary support in 2006. This scheme increases the statutory age for early retirement by two years over the period 2019-2023, and the statutory pension age by two years over the period 2024-2027. After these transitions periods, the statutory ages are linked to longevity via an indexation mechanism targeting an average retirement period of 19.5 years.
This reform is a significant response to the challenge of Denmark’s aging population, although recent assessments show that the reform does not fully solve the problem.

Pension policy in Finland has been successful. The pension system has two pillars, a residence-based national pension and an employment-based, earnings-related pension. In addition, private pension schemes exist. The mixture of public and private pension schemes appears functional and able to mediate unfavorable outcomes. For instance, in regards to the poverty rate for people aged 65 or older, Finland has been able to steer clear from the classic problem of poverty in old age. Still, the population in Finland is ageing, which creates problems in terms of labor force maintenance as well as fiscal capability. A reform of the pension system in 2004-2005 aimed at a more flexible policy and at creating incentives for older workers to keep working until 68 years of age. Preliminary evaluations indicate that the reform might be successful, and the employment rate of older individuals has been increasing. However, pension levels have increased only marginally and the purchasing power of retirees has been decreasing relative to that of wage earners. A recent attempt from a part of government to raise the pension age has been received unfavorably from opposition parties and labor market organizations, and will most probably fail.

The pension system is well-positioned to sustain the ageing wave of the next decades. With persistent relatively high birth rates, the demographic burden is less than in most comparable countries. Future pensions are underpinned by massive savings in the petroleum fund, now renamed the Government Pension Fund - Global (Statens pensjonsfond-Utland).
In 2009, a pension reform was implemented which has further strengthened the sustainability of the system. The crux of the reform was to introduce more choice and flexibility on retirement and mechanisms of demographic gradual adjustments into the system. A major intention, in addition to improving financial sustainability, was to carefully redesign contribution and benefit rules in the direction of encouraging employment and discouraging early retirement. This reform was prepared carefully, starting with the appointment of a cross-party pension commission in 2001 which reported its findings in 2004, leading to a five-year process of political implementation which culminated in a relatively broadly agreed reform in 2009. There was criticism during the process of the reform being “too little too late,” but that criticism has mainly subsided.
Pensions are by international comparison generous and equitable, and are set to so remain. The universal basic minimum pension is on a sufficient level to by and large eliminate the risk of poverty in old age. The recent reform has strengthened the link between contributions and benefits in earnings-related pensions and has improved intergenerational equity in the system. There is broad confidence in the population in the adequacy of future pension from the state system and hence no massive escape into the refuge of private pension insurance.

The Swedish pension system underwent reforms in the 1990s. The previous so-called ATP system, which based pensions on the 15 years of highest income, was replaced by a system which based pensions on an individual’s accumulated earnings over an entire lifespan. Additionally, the reform introduced the possibility of investing a certain portion of retirement savings in an individual investment fund (“premium reserve”).
The system recalibrated burden-sharing in the Swedish pension system. Many people in the workforce sign private pension insurance schemes to secure the standard of living after retirement. Additionally, occupational pensions increased during the recent decade and became an important supplement in retirement provision.
Estimations show that the fiscal sustainability of the Swedish pension system is high compared to other OECD countries. Past reforms enabled this performance. Nevertheless, the retirement age is still an issue discussed controversially in the public. The risk of poverty caused by old age seems low in Sweden, especially for those who had a long working career and could supplement their retirement income with occupational pension schemes. The equity between the generations in the pension system is difficult to assess. Most studies state that the reform did not erode inter-generational equity – as long as the entry into the labor market for the adolescent generation is not blocked. The current problem of high youth unemployment, therefore, will determine the degree of inter-generational equity in the long run.

The Swiss pension system is based on three pillars, each with its own logic of financing and redistribution. The basic idea is that pension income should not be below the subsistence level, and should provide 60% of average preretirement income. The first pillar guarantees a basic income. The minimum benefit level for a couple is CHF 26,880 (about €18,500) per year, while the maximum benefit is CHF 41,040 (about €28,300 ). Employers and employees finance it via contributions. It is a pay-as-you-go-system, and is highly redistributive since the maximum benefit level (for high-income groups and couples) is just 1.5 times that of the minimum benefit level, whereas contributions are proportional to income, making the maximum contribution level thus much higher than 1.5 times the minimum contribution level.
The second pillar is a funded system financed through contributions by employers and employees. Contributions and benefits are proportional to income. Employees whose income from the first pillar already covers about 60% of their wage income are not entitled to this system. Many pension schemes – particularly in the public sector – are very generous, and provide pension incomes (first and second pillars combined) above 60% of previous income.
The third pillar is tax-deductible savings up to about CHF 6,566 per year (about €4,500). This system benefits high-income groups, since they can afford to put aside these sums and have the highest returns on these savings given the tax advantages.
Demographic changes represent major challenges to the first pillar. Provided there is no major change in economic growth rates, the sustainability of this first pillar is in question unless the average age of retirement (currently 65 for men and 64 for women) is increased or benefit levels fall.

Chile’s pension system combines a redistributive means-tested pillar financed by general taxation with a self-financed pillar based on individual contributions and individual pension accounts, which are managed by private pension fund managers and invested both domestically and abroad. The redistributive pillar was extended and broadened very substantially by a 2008 pension reform that implemented means-tested pension subsidies, guaranteeing a pension floor to all older citizens that is very high relative to the country’s minimum and average wages. The reform also provided pension benefit entitlements to women based on the number of their children, with no ceiling on the number of children.
It is a matter of some debate whether the Chilean pension system guarantees intergenerational equity or prevents poverty caused by old age. Some point to the fact that many pensions are so low that elderly individuals have to be supported by their children and other family members. Others argue that both public and private pension systems are fiscally sustainable (like those of Norway, the best-funded system among all OECD countries), and are thus providing both intergenerational and intragenerational equity across income groups.

The public pension system is well-developed, with a minimum monthly pension of €1,514 producing a redistribution of wealth in favor of the elderly. This can be illustrated by the following citation from the 2009 OECD Pensions survey: “On average, men in Luxembourg will receive around $825,000 in pensions over their lifetimes and women around $1 million. Luxembourg may be an extreme example, but lifetime pensions are worth $400,000 for men and $475,000 for women on average in OECD countries.”
Despite its extreme generosity, the public pension system is doing well, with huge reserves of around €10 billion, or 3.6 times annual expenditure. This is due to the recent sharp increase in the workforce, which has led to growth in the number of affiliated members, as well as their relative youth. But funding is only provided in the medium-term and will be threatened when the number of affiliates starts to decline. According to the Social Services Authority in Luxembourg (Inspection Générale de la Sécurité Sociale, IGSS), employment in the country will need to treble by 2060 to maintain pension equilibrium.
The Luxembourg Business Union (Union des entreprises luxembourgeoises, UEL) is concerned about a system that, even based on optimistic assumptions, will produce a cumulative deficit of 190% of GDP by 2050, and has presented a plan to reform it. Some of its propositions include: reducing the current replacement rate (which is now often above 75%); removing the systematic and automatic adjustment of pensions to the general trend of wages, lowering the maximum contribution threshold, which is currently €8,413; and encouraging employees to opt for a later retirement.

The Dutch pension system is based on three pillars. The first pillar is the basic, state-run old-age pension (AOW) for people 65 years and older. Everyone who pays Dutch wage tax and/or income tax and who is not yet 65 pays into the AOW system. Given that this contribution income is used immediately to pay out AOW benefits, the system may be considered a “pay-as-you-go” system. In comparison to other European countries, this pillar makes up only a limited part of the total old age pension system in the Netherlands. Because the current number of pensioners will double over the next few decades, the system is subject to considerable and increasing pressure. The second pillar consists of the occupational pension schemes which serve to supplement the AOW scheme. The employer makes a pension commitment and the pension scheme covers all employees of the company or industry/branch. The third pillar comprises supplementary personal pension schemes which anyone can buy from insurance companies.

The government’s attempt to increase the age of retirement from 65 to 67 was met with controversy in the country. As a result of the financial crisis, pension fund assets are shrinking. At the same time, however, the liquidity ratio of pension funds must be maintained at a minimum of 105%. But some funds failed to properly estimate their liquidity ratios in the context of the economic crisis. As a result, the funds have to report to the Nederlandsche Bank (DNB), which is the financial authority in this matter, as to how they aim to achieve this level. The timeframe for the recovery was increased from three to a maximum of five years.

New Zealand’s pension system is tax-based. It is highly efficient, as it effectively prevents poverty in old age with a relatively low level of public spending measured as a percentage of GDP. The most recent innovation in this policy area is KiwiSaver, a publicly subsidized and private pension plan offered on a voluntary basis and introduced in 2007. KiwiSaver enjoys broad political support and the new National-led government has made commitments to continue the plan with some minor modifications. KiwiSaver is a popular option, and at the beginning of 2010, about 1.3 million people have joined the scheme. Longer-term, however, demographic changes mean that more effort must be made to encourage private savings as part of a strategic plan to address public sector affordability issues and intergenerational equity challenges. The economic downturn and rising unemployment makes it a difficult time to encourage further private saving, and yet intergenerational equity and affordability suggest the urgent need to further alter these policies.

Public pensions in the United Kingdom, which average just 41% of preretirement net earnings, are the lowest in the OECD area (where the average is 70%). However, as the UK has a much greater reliance than other EU countries on occupational (2nd pillar) and private (3rd pillar) pensions, it is evident that the public-pension figure does not tell the whole story. Preventing poverty among pensioners – especially among those who retired before the occupational pension boom – is nevertheless still a challenge for British pension policy, because 20% of pensioners live below the poverty line. While improvements have been achieved compared to the situation a decade ago (when the corresponding ratio was 27%), much remains to be done.

A “minimum income guarantee” with above-inflation increases and a commitment to let disbursement levels increase in line with earnings rather than prices has been one of the government’s instruments for improving pensioners’ situation at the lower end of the earnings scale. One-off payments such as the “winter fuel allowance” and free TV licenses have also been introduced, and several of these have in fact become permanent. But entitlements often go unclaimed by eligible pensioners because of the bureaucracy surrounding the new benefits; as a result, policy in this area is less effective than it could be.

In terms of fiscal sustainability, policy has been relatively successful. The UK is one of the few OECD countries which did not cut pension entitlements in recent years, and has even been able to extend them. By encouraging private investment in pension plans as well as emphasizing fiscal sustainability, this policy area is also quite effective in terms of intergenerational equity. In the recent financial market crisis, pension policy profited from the 2009 stimulus package, in which the government gave payments of £60 to all pensioners, thus effectively doubling that year’s increase in the basic state pension. In 2010, a further 2.5% increase in the basic state pension will take place.

The Czech pension system is characterized by a dominant public pillar providing relatively generous pensions. There have been attempts over the last several years to find consensus on more substantial reforms to the pension system. A new expert group in charge of preparing a reform proposal was set up in January 2010 by the Ministry of Labor and Social Affairs. Agreement has been relatively easy on gradual increases in the retirement age. The retirement age is currently being gradually increased to reach 63 for men and 61 for women in 2012. Further change has been blocked by disagreement over the future role for private pension funds. Any future pension reform has also been complicated by a Constitutional Court judgment of April 16, 2010, which found the existing system to be unconstitutional. The extent of the gap it created between contributions from the highest incomes and the level of pension received was judged to be unjust. Parliament has been allowed until September 2011 to undertake necessary revisions to the existing law, which could imply reductions in the lowest levels of pensions so as to allow for increases at the top end.

There has been a large number of pension reforms in the recent past, most recently involving the gradual increase of the age of pension eligibility from 65 to 67, a provision adopted in 2007. All these reforms have boosted the long-run sustainability of the pension system, leaving it in a favorable condition compared to systems in France or southern European countries, for example.
However, given the increasing political power of pensioners, the long-term nature of this success can not be guaranteed. In our period of observation, two relevant examples can be noted. First, the government decided that in 2008 and 2009, pensions benefit levels should be increased by more than the amount determined by the pension formula. Second, the link between pensions and wages was temporarily loosened in May 2009, because wages decreased. With an eye to the coming elections, the government introduced a law guaranteeing that no nominal cuts in pensions would occur. However, this guarantee is to be compensated for by lower pension growth rates in subsequent years. This nominal pension guarantee is still in force; as a result, the pension system faces additional burdens of about €10 billion through 2013.
In spite of these wrong turns, the substance of the recent pension reforms remains effective, keeping the German pension system more stable. Whether the German pension system puts an unacceptable burden onto the younger generation is a controversial question, however. It is unavoidable that there will be a double burden on the younger generation in an era of falling fertility: necessarily, the younger generation will have to honor the older generations’ pension promises while simultaneously caring for their own pensions to a larger extent than did former generations. But one can also argue that the younger generation benefits from much higher real incomes than those of their parents or grandparents, justifying a higher pension burden.
However, the pension system alone will be less successful in the future in preventing poverty among the elderly. Today’s pensioners are relatively wealthy, and only rarely exposed to poverty. Longer unemployment spells in the current working population will increase the risk of poverty in the future. Preventing poverty among the elderly will become the next big reform issue for the German pension system.

Hungary has had since 1997 a three-pillar pension system with a mandatory private second pillar. The Bajnai government increased the sustainability and the intergenerational equity of the scheme by abolishing the “13th month pension” introduced in 2003, and by increasing the retirement age from 62 to 65. The adopted decrease in social security contributions might help reduce tax evasion and increase employment rates, thereby improving the medium-term financial situation of the public pillar and even increasing overall pension claims in the future.

Pension policy is partly based on a tax-financed, means-tested public social security program, and partly on occupational pension funds and voluntary savings encouraged through the provision of tax incentives. The pension funds, with employee contributions of 4% of total wages and a complementary employer contribution of 8%, are aimed at giving retirees a pension equivalent to 56% of their average working-life wages. Employees can opt to pay a further 4% of their wages, with a 2% employer contribution, into a voluntary savings program. In the past, it has appeared that Iceland’s pension policy was both conducive to poverty prevention and fiscally sustainable. However, the economic collapse caused heavy losses for most if not all of these pension funds, which had invested in stocks in the Icelandic banks that collapsed in 2008 as well as in additional companies that went bankrupt. These losses have caused most of these pension funds to reduce payments to their members, imposing a further reduction in the living standards of the elderly. Recent reports suggest that the pension funds are on their way to a robust recovery, however. More broadly, the pension funds have been pressured by the government and the banks to invest locally in projects considered to be helpful to strengthening the country’s economic recovery. It remains to be seen whether the pension funds can withstand those political pressures.

Poland has featured a modern three-pillar pension system since 1999. The Tusk government succeeded in improving the sustainability of the public pillar by drastically limiting the access to early retirement. However, it has refrained from equalizing the retirement ages for men (65 years) and women (60 years), a move that would both improve the financial situation of the public pillar and reduce poverty in old age among women. Like previous governments, the Tusk government has not dared to reform the generous pension scheme for farmers (KRUS). The continuing fiscal problems of the first pillar and the losses suffered during the global financial crisis by the private pension funds, which form the obligatory second pillar, have sparked a debate within government about redirecting some funds from the second pillar to the first. This debate has raised concerns about the future of the Polish pension system.

Slovakia has a three-pillar pension system with a strong mandatory second pillar that has won much international acclaim. The Fico government’s pension policy largely focused on strengthening the financial situation of the first pillar by inducing those who have opted out of the first pillar to return. Breaking with the original rules, the second pillar was “opened” twice in 2008. However, the government’s campaign against the second pillar largely failed, with only few people returning to the first pillar. The popularity of the second pillar amidst declining returns partly rests on the possibility for policyholders to bequeath savings. Moreover, the National Bank of Slovakia bolstered the support for the scheme. Rejecting claims by the government, it publicly emphasized the sound supervision and the high efficiency of the scheme. Except for the opening of the second pillar, the Fico government did little to make the first pillar more financially viable.

No major changes have been made to the U.S. Social Security system during the Obama administration. The system, which is funded by mandatory employee and employer contributions, serves as only one prop of the pension system, complementing a private system of company-based saving plans (so-called 401k plans) that receive tax subsidies, and a variety of private retirement accounts. The wage replacement rate of the public system is at 45%, below the OECD average, but benefits from company-based and private accounts raise the rate to 80% for those who participated in these programs. However, 78 million Americans have no access to company-based insurance schemes. Particularly small companies do not offer any or only incomplete plans. The financial crisis has hit the asset base of pension funds, which primarily invested in stocks and investment funds, with losses of up to 25%, a trend that is being reversed with the recovery. Obama rejects the efforts by the Bush administration to partly privatize the system and instead favors incremental reforms, such as raising the ceiling on an employee’s earnings subject to the social security tax. For company-based plans, the administration favors automatic participation in private plans if participation is below average or no plans are offered. Subsidies would provide the necessary incentives.

The Austrian pension system is based on three pillars: public, employer and private-based systems. The employer and private-based pension pillars are still of marginal importance.
The Austrian public pension system, which is based on the concept of an inter-generational contract, has been repeatedly adapted over time in order to cope with looming demographic changes as a result of trends in aging. Currently at about 27%, Austria’s old-age dependency ratio (persons aged 15-65 relative to persons aged 65+) is set to increase to 55% by 2050, whereas the general European ratio, currently at 24.3%, will increase to 41.7% during the same period. Despite its recent reforms, the Austrian pension system is not set to cope with such challenges, and younger generations generally agree that they will not be entitled to an equally generous pension system on par with that of their parents.
These demographic changes and the hesitant response to them must be seen as a potential danger for the not-too-far future. Austrians still retire very early, men on average at 59 years, women at 58 years, and the existence of different pension systems contribute to large differences in pension benefits received. These issues are discussed intensely, and the integration of the different pension systems has at least begun.

Belgium relies on three pillars to finance pensions: a pay-as-you-go system whose fiscal sustainability is currently under threat; a fully funded system financed by employers, which depends on sectoral agreements (and therefore operates fully only in some sectors); and a tax-sheltered savings program (which is only used by taxpayers with higher-than-average income). The sustainability of the pay-as-you-go system is endangered largely because the labor-market participation of older workers is too low (the effective retirement age is around 58), a fact that will put significant pressure on the public pension system beginning in about 10 years (de la Croix estimated in 2002 that the yearly cost of population aging would be as high as 5% of GDP in 2020). Hence, the Belgian pension system will require reforms that help increase the participation rates of older workers.
Whether pension policy guarantees intergenerational equity depends on the considered pillar: The pay-as-you-go system is too generous today to guarantee the same benefits to the next generation. Fully funded systems are instead more likely to provide similar performance (but the actual return to these programs is highly uncertain, as the current economic crisis has made clear). Regarding its effects on poverty, the picture is clearer: The pension system is expensive, but does generate substantial poverty reduction. Yet, it is not sufficient to guarantee poverty levels below the EU average (Belgium has the 10th highest poverty rate in the EU-27 for the population 65 years or older.

The Irish system of pension provision rests on three pillars: a public old age pension (funded on a pay-as-you-go basis through social insurance contributions that at present equal ), occupational pensions (funded by contributions from employers and employees), and personal, individual pension plans.
The adequacy of the first pillar, the state pension, has increased in recent years, and the goal of raising it to one-third of (pre-tax) average employment income has been endorsed by all the main political parties. The pension is not income-related. It is a flat amount, equal at present to €920 a month for a fully qualified individual. There are increases for qualified dependents. The pension has risen significantly in real terms over the past two years, partly due to the fact that it has not been adjusted downward to reflect the period’s falling prices.
According to the National Pensions Framework (NPF), between 2004 and 2008, consistent poverty among older people fell from 3.9% to 1.4% while the proportion of older people at risk of poverty has fallen from 27% to just over 11%.
At present, the normal qualification age for pensions is 66, but there is a transitional retirement pension beginning at age 65. The proportion of persons of working age relative to those over 65 years of age is projected to fall from the current 5:1 ratio to less than 2:1 by mid-century. This will increase the burden associated with financing the state pension. With this in mind, the NPF proposed abolishing the retirement pension and raising the qualifying age for the main pension to 67 in 2021 and 68 in 2028.
Ireland ranks with the United Kingdom and the Netherlands among Europe’s best in terms of the size of existing private pension funds relative to GDP. About 55% of the workforce has made some pension provision for their retirement outside the main state scheme. The government has sought to increase this proportion to 70%, but no progress has been made on this front in recent years. However, the second pillar of the national pension system, occupational plans, has come under very severe pressure following the stock market crash of 2007. Irish pension schemes were heavily invested in equities (and within this asset class, a disproportionate share was held in Irish equities). A majority of occupational schemes now face very large deficits, and are struggling to bring forward funding proposals to the National Pensions Board.
As a result of the occupational pension funding crisis, many defined-benefits (DB) programs are now being wound up or closed to new members, and continuing members are being moved to defined contribution (DC) schemes. This implies that members rather than employers will in the future bear the risk associated with fluctuations in asset values.
For those not already covered by occupational pension plans, and who have no voluntary private schemes, the NPF envisages making enrollment in a pension program semicompulsory in the future. (The basic idea is to impose a system of auto-enrollment, making it incumbent on employees to opt out rather than to opt in). This has some of the features of an increase in the rate of contribution to the Social Insurance fund.
As the main state pension program is run on a “pay-as-you-go” basis, it cannot be regarded as sustainable in view of (1) the increasing proportion of the population that will be of pensionable age, (2) the increased longevity of this population, and (3) the massive fiscal deficit that has emerged since 2007. The proposals in the recently launched NPF address the sustainability issue, but not convincingly. Moreover, the proposals contained in the NPF have yet to be implemented.
In the past, the pension system fared well in terms of poverty reduction and intergenerational equity, but these achievements are now threatened by the underlying issue of sustainability.

The average age of Korea’s population is rising much faster than is the case in many other OECD countries. The share of the population 65 years old or more will increase from 7% in 2000 to 37% in 2050. This relatively quick demographic shift is taking place in part because Korea has been very successful in reducing infant mortality rates and increasing life expectancy, while failing to maintain birth rates near the replacement rate. Since 1996, the fertility rate has dropped from 1.6 babies per woman, just below the OECD average, to less than 1.2 children per woman. Korea now has the lowest birth rate of any OECD country.
Old age remains a major source of poverty in Korea, as pension payments are low and most older people today lack coverage under a pension system that did not cover a large share of the working force until expansion of the program in 1999. The government has also failed to enforce mandatory participation in the system, and many employers fail to register their employees for participation. The pension system is currently fiscally sustainable and needs only small subsidies. This is because the pension system is organized in the form of a pension fund, and contributors currently far outnumber pension recipients. However, given the risks involved in pension funds, it is not clear what level of subsidies the fund will require once the contributors who have entered since 1999 retire. Three older and much smaller pension funds for government employees, military personnel and teachers are already running deficits and have to be subsidized by the government. Given the low fertility rate and the aging of Korea’s society, the country’s pension funds will almost certainly need more subsidies in the future.
Korea’s pension funds also seem to be vulnerable to government interference. For example, in 2008 the government told the National Pension Fund to invest a larger share of its assets in Korean stocks, seeking to stabilize the stock market during the global financial crisis.

The pension system in France is composed of very different regimes, depending on their public or private status, but also according to sectors and professions. Pensions are more generous for public servants. In any case, all regimes are built up according to the “pay as you go” rule, while private pension funds barely exist. Whereas the pension system is quite generous, with the pension age fixed at 60 years, and shows a good capacity for preventing old age-poverty, it faces growing problems of long-term financial sustainability.
In spite of multiple piecemeal reforms, the pensions system will not be able to face the challenges of the future. Payments are higher than contributions, resulting in a deficit of more than €7 billion in 2009, and the situation will be even worse in 30 to 40 years when the number of pensioners will equal those of contributors. Over the past 10 years, governments have tried to introduce reforms on several fronts: an increase of contributions; an increase in the number of years of contribution, up to 42 years; and in 2008, a reduction of peculiarities or privileges granted to “special regimes.” But in parallel, young people enter the labor market late while only 38% of people over 55 are still working. Further reforms are needed. Therefore, President Sarkozy and his government have decided to come back again to this issue. A new reform bill presented in June 2010 and adopted in October 2010 increased the pension age from 60 to 62 years.

In recent years, Italy’s pension policy has undergone partial reforms that have somewhat improved its sustainability by slowly and gradually increasing the age of retirement, and by reducing benefit levels. To the end of further strengthening sustainability, the current government has introduced a mechanism linking the rise in the official retirement age to the aging of the population.
Given the imbalance between an increasingly elderly population and the relatively smaller size of the younger generations, further reforms to the pension programs will probably be needed in the future. The current situation guarantees only limited intergenerational fairness, as the younger generations contribute to the pensions of today’s retirees, but will receive smaller amounts themselves upon retirement. Already, today’s pensions are unable to prevent old-age poverty fully for a significant share of the population.
More broadly, the central problem of pension policy in Italy is that pensions absorb the largest share of the welfare state’s financial resources. This fact helps stabilize and benefit the elderly, but punishes younger generations who are paying for the system today, in such a way as to contribute to the low birth rate that will ultimately make the pension system itself less sustainable, by ensuring a shrinking of the working age cohort.

Mexico underwent a major pension reform that took effect about a decade ago, moving the existing system of contributory pensions for workers in the formal sector from a pay-as-you-go system to a defined-benefit system operated by government-approved financial agencies called Afores. (The new system was limited to new entrants, while those who were already retired continued to receive state pensions). The objectives of this reform were to raise the domestic savings ratio, to find a means of covering an elderly population that is growing rapidly, and to broaden coverage so as to help poorer Mexicans. The new system has been working reasonably well, although the pension funds have come under pressure to buy government bonds and help cover the public deficit arising from the recession. In 2009, the majority of Afores funds were actually invested in government bonds. Some Mexican states have in recent years introduced noncontributory old-age pensions based on universal eligibility. The amounts are quite small and involve more of a topping up than anything else. The general system seems fiscally sustainable, though in some rare cases, separately negotiated public sector pension systems do raise issues of sustainability. This is clearest in the case of the state oil company PEMEX.

The pension system represents the largest single piece of social spending. It accounts for more than 30% of the state’s budget and over 8% of Spanish GDP. The Socialist government has committed to an increase in pensions of between 3.4% and 7.2%. This increase should affect the minimum pension level, as the measures contained in the government’s Plan E (see Economic Policy) include a rise in this amount larger than seen at other income levels. As a result, the task of poverty prevention has been addressed and partly accomplished. Nevertheless, the elderly remain among the most economically vulnerable people within the system.
On the other hand, the economic crisis has led to a steep decrease in contributions to the social security program. This, combined with the process of population aging –which is stronger in Spain than in any other European country – has reopened a much-needed debate on the long-term fiscal sustainability of the pension system (for example, the social security surplus declined by 41% in 2009 as compared to the previous year). Early in 2010, the Socialist government proposed what amounts to a radical reform project. In line with discussions in other developed countries such as the United Kingdom, the proposal features a delay in the official retirement age to 67 years, a provision that would come into force in 2013. The minimum age to enter early retirement will be also increased, so as to limit use of this mechanism. At the same time, the contribution period taken into consideration in calculating the pension amount will be longer; and some changes are also planned to widow and orphan pensions.

While the Social Security and General Health Insurance Law, which was passed in 2006 and went into force in October 2008, radically modified the previous pension and health system, the Social Security Institution Law transformed the institutional basis of social policy. These developments have had several positive aspects. First, as emphasized by Adar (2007), they put an end to the inegalitarian, corporatist character of the previous system with its highly fragmented structure, and made the Social Security Institution, under the auspices of the Ministry of Labor and Social Security, responsible for the management of social security provision. Second, with the new changes, the state began to contribute to the social security system along with employers and employees. Third, the new Social Security and General Health Insurance Law embraces all social groups, including those not formally employed, and assures universal access to health services on equal terms. Finally, those under the age of 18 are covered by the health insurance scheme without having to pay premiums.
Although Turkey is a very young society, the population is aging. The number of persons receiving pension benefits is growing rapidly, rising from 4 million in 2001 to 7.25 million in 2010. The previous system, thus, was not sustainable.
At the beginning of 2010, almost 1 million persons aged 65 or more who did not have an entitlement to any pension security received a substitute pension payout from the government, amounting to less than TRY 100, or approximately €52. Farmers who have paid only the minimum premium level receive approximately €180, craftsmen who paid the minimum premiums receive €265 and wage-workers €340 per month. These payments are far from assuring a livelihood. A government-guaranteed private pension security system has also recently been introduced in Turkey.
The main drawback of the current social insurance programs, covering 80.2% of population in 2008, is that the revenues can not meet expenses, causing a financial gap in the system. The main reasons for this deficiency are the negative effects of the early retirement provisions implemented in the past, increases in health expenditures, and insufficiencies in the system’s information technology infrastructure. To cover the financial gap, the central government has had to transfer a substantial amount of general budgetary funds, amounting to 3.92% of GDP in 2007 and 3.70% of GDP in 2008.

With a rapidly aging population, Japan faces critical challenges in setting up and administering a sound, equitable and distributionally acceptable pension system. The last major overhaul was based on 2004 legislation and became effective in 2006. Under its provisions, future payments will rise less than inflation, payments (after an intermediate period) will commence at age 65 instead of age 60, contributions top out at 18.3% of income, and a payout ratio of 50% is promised. However, the program’s assumed relationship between future payment levels, contributions and the starting age for receiving benefits is based on optimistic macroeconomic forecasts. Following the experience of the global financial crisis, these assumptions seem increasingly unrealistic, and further reform is needed.

Another critical issue is old-age poverty. A third issue concerns the technical efficacy of the mechanisms employed. At this point, the assets of the Government Pension Investment Fund are mostly held in Japanese government bonds. Given the financial precariousness of Japan´s public debt, it seems advisable to spread the risk further, but this might lower public trust in the soundness of public debt. A major technical issue was the government’s recent loss of millions of pieces of contributor data, which led to a public uproar in 2007. LDP governments were unable to handle this controversy in an acceptable manner, and the loss of faith in former Prime Minister Yasuo Fukuda, which eventually led to his sudden resignation in September 2008, was partly related to this pension scandal.

However, the succeeding Aso and Hatoyama governments still had to deal with the lost data issue. Separately, Hatoyama suggested the use of more tax revenues to finance the pension system, but no specific policies have been put in place; it is unclear which (new) sources of tax revenue could be used for this purpose. At the time of writing (August 2010), more concrete proposals for pension reform were expected later in the year.

Portugal’s pension policy does not achieve any of the system’s primary goals. That is, available funds are not sufficient for any of the three goals: Poverty is not prevented, retirees only receive one-third of the country’s minimum wage, and the program is not fiscally sustainable. Moreover, it is worse for women. For example, in January of 2010, the average old age pension for a woman was €301.42 (with 991,841 women receiving old age pensions), while the average for men was €505.41 (with 874,071 male recipients); that is, the pension level for women was only 59% of that received by men.

Pension policies in Greece are not fiscally sustainable, and do not guarantee intergenerational equity. At the current rate of public pension expenditure, the deficit shown by the public pension system is expected to reach 7.7% of GDP in 2030 and 15.7% in 2050. The system’s distributional principles favor today’s pensioners as well as the currently middle-aged cohort whose pension rights will mature in the next few years. Younger generations will face many more constraints unless the government urgently embarks on a streamlining of the pension system. At the same time, the protection offered to pensioners is currently very uneven. As comparative OECD data for 2009 shows, the net income replacement rate of the median pension earner in Greece was 110% (down from 113% in 2007). The OECD average for 2009 was 71.8%.
The apparent Greek generosity does not mean that the elderly in Greece thrive on pensions. Large shares of pensioners coming from the private sector receive minimum pensions and live close to the poverty line. At almost 23%, senior citizen poverty is almost double the OECD average. However, retired people who receive pensions from the liberal professions’ occupational programs, from state-owned enterprises or banks do comparatively well. The remainder of pensioners struggle to make ends meet, often relying on minimum pensions plus a small allowance. In Greece, the labor-force exit age (the real retirement age) in 2007 was 60.9 years, which was close to the OECD average of 62.3. However, there were large discrepancies among public pension programs, with some allowing for very early retirement. In brief, pension policy in Greece fails to meet fiscal criteria and criteria of distributional justice.