PensionsataGlance2011(PPT)

18-Mar-2011

Pensions at a

Glance 2011

John P. Martin

Edward Whitehouse

Directorate for Employment, Labour and Social Affairs

/els/social/pensions/PAG

Launch of Pensions at a Glance 2011 report

Institute for Fiscal Studies, London, 17 March 2011

What’s new?

•More countries

–four new OECD members

–other G20 economies

(Argentina, Brazil, China, India,

Indonesia, Russia, Saudi Arabia, South Africa, EU27)

•More indicators

•Five special chapters

–pensionable age and life expectancy, 1950-2050

–trends in retirement and in working at older ages

–pension incentives to retire

–helping older workers find and retain jobs

–linking pensions to life expectancy

1

18-Mar-2011

Agenda: four key objectives and principles

•Financial sustainability

•Work incentives

•Security in the face of risk and uncertainty

•Benefit adequacy and coverage

1

Financial sustainability

2

18-Mar-2011

Public pension spending

Italy

France

Greece

Poland

Germany

Sweden

EU-27

Spain

OECD-28

United Kingdom

Level in 2007

Netherlands

Canada

United States

Projected

Ireland

change,

Australia

2007-60

0 5 10 15 20 25

Note: 2050 for Australia

Public expenditure on old-age and survivors’ benefits, per cent of GDP

Demographic (in)determinism

25

Public expenditure on

pensions, per cent of GDP

20

15

2010

R2=0.586

France

Italy

Austria

10

Poland

Germany

Sweden

Turkey

Netherlands

United Kingdom,

Estonia, Switzerland

5

Ireland

Canada, New Zealand,

United States, Australia

Mexico

0

Korea

0 10 20 30 40 50 60 70

Dependency ratio: percentage of adult population aged 65+

3

18-Mar-2011

Demographic (in)determinism

25

Public expenditure on

pensions, per cent of GDP

20

15

2010

R2=0.586

10

5

0

0 10 20 30 40 50 60 70

Dependency ratio: percentage of adult population aged 65+

Demographic (in)determinism

25

Public expenditure on

Greece

pensions, per cent of GDP

Luxembourg

20

Slovenia

Spain

15

2010

R2=0.586

Belgium

Italy

Norway

Portugal

Turkey

Germany

10

United

Poland

Kingdom

Canada

Korea

5

United

States

Australia

Mexico

2050

R2=0.112

0

0 10 20 30 40 50 60 70

Dependency ratio: percentage of adult population aged 65+

4

18-Mar-2011

2

Work incentives

Trends in pensionable ages

Pensionable age, OECD average, years

65

Low Today

point

64

Men

63

62

Women

61

60

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

5

18-Mar-2011

Normal pension age: long-term rules

Number of OECD-34 countries

25

AUT

20

BEL

CAN

CHL (60F)

CZR

FIN

15

GRC

HUN

IRE

ITA (60F)

JPN

10

KOR

LUX

MEX

NLD

NZL

AUS

5

POL (60F)

DNK

PRT DEU

ESP ISL

SWE ISR

FRA EST CHE

(64F)

NOR

0

SVK SVN TUR USA GBR

61 62 63 64 65 66 67 68 69 70

Normal pensionable age, years

Trends in life expectancy at age 65

Additional years of life expectancy at age 65, OECD average

30

25

Women

20

Men

15

10

5

0

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

6

18-Mar-2011

Life expectancy at pensionable age

Additional years of life expectancy at normal pension age

25

Women UK

Women OECD

22.5

20

Men OECD

17.5

Men UK

15

12.5

10

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Pension incentives to work/retire

•Change in pension wealth from working an

additional year

–age 60-65: main retirement window

–express as proportion of individual earnings: implicit

tax or subsidy

7

18-Mar-2011

Pension incentives to work/retire

Netherlands

Poland

Germany

Finland

Hungary

France

Spain

Japan

Sweden

Ireland

United Kingdom

New Zealand

United States

OECD

Canada

Australia

Italy

Belgium

Turkey (-34), Greece (-90),

Portugal

Luxembourg (-76)

- 30 - 20 - 10 0 10 20 30

Change in pension wealth from working an additional year,

between ages 60 and 65, per cent of annual earnings

Pension incentives to work/retire

•Change in pension wealth from working an

additional year

–age 60-65: main retirement window

–express as proportion of individual earnings: implicit

tax or subsidy

•Level of pension wealth already accrued

–at age 60: beginning of retirement window

–express as a multiple of individual earnings

8

18-Mar-2011

Retirement incentives summary

Change in pension wealth from age 60 to 65

Low Middle High

Low Mexico Germany, Ireland, Chile, Czech R.,

Sweden, UK, US Japan, Korea, Poland

Middle Australia, Belgium, Denmark, Finland, Austria, Israel,

Level of pension

Canada, Estonia New Zealand Norway, Switzerland

wealth at age 60

High Greece, Italy, France, Hungary, Iceland, Netherlands,

Luxembourg, Spain Slovak R.

Portugal, Slovenia,

Turkey

3

Security

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18-Mar-2011

Diversification

•‘It is the part of a wise man to keep himself today

for tomorrow, and not venture all his eggs in one

basket’

(Miguel de Cervantes, 1605, Don Quixote)

•Pay-as-you-go public pensions:

–sustainable rate of return = earnings growth +

employment growth

•Funded pensions

–rate of return in capital market directly or indirectly

affects pension value

•Think of pension package as a ‘portfolio’ of

different ‘assets’

Diversification

•Benefits of diversification depend on correlation

between returns

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18-Mar-2011

Diversification

•Benefits of diversification depend on correlation

between returns

Correlation between real earnings growth and real return on ‘balanced’* portfolioInvestment

portfolio

Canada France Germany Italy Japan Sweden

United United

Kingdom States

Domestic 21.2 -9.7 -8.6 -22.0 8.3 12.4 -28.2 3.5

(34.4) (66.9) (76.1) (38.1) (69.2) (58.2) (15.3) (86.1)

OECD-8 16.3 -26.0 -14.6 1.9 -15.2 8.8 -11.6 4.8

(47.0) (24.2) (60.3) (93.4) (50.0) (69.7) (60.8) (83.3)

Note: ‘Balanced’ portfolio comprises 50% equities, Correlation coefficient and p-value in per cent

50% government bonds. ‘Domestic’ includes only home

capital markets, OECD-8 diversifies investments between

all countries shown.

Incomes in old age

Public transfers Work Capital

France

Hungary

Germany

Sweden

New Zealand

OECD

Denmark

Ireland

United Kingdom

Netherlands

Japan

Switzerland

Canada

Australia

United States

0 25 50 75 100

Sources of income of over 65s, per cent of total

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18-Mar-2011

Retirement-income packages

Public benefits Private benefits

Italy

France

Germany

New Zealand

OECD

Switzerland

Canada

United States

Hungary

Sweden

Ireland

United Kingdom

Poland

Australia

Mexico

0 25 50 75

Weighted average pension entitlements,

100

new entrants in 2008, per cent of total

Pension assets

Netherlands

Iceland

Switzerland

Australia

United Kingdom

United States

Chile

Canada

Ireland

Denmark

Japan

Poland

Portugal

Hungary

Private

New Zealand

Spain

Mexico

Sweden

Norway

Germany

Slovak Republic

Italy

France

0 25 50 75 100 125

12

18-Mar-2011

Pension assets

Netherlands

Iceland

Finland

Switzerland

Sweden

Australia

United Kingdom

Japan

United States

United States

Chile

Canada

Ireland

Ireland

Canada

Denmark

Japan

New Zealand

Poland Australia

Portugal

Hungary

Private

Portugal

Public

New Zealand

Spain

Government

Spain

Mexico

Belgium

bonds and bills

Sweden

Other investments

Norway

Norway

Germany

France

Slovak Republic

United Kingdom

Italy

France

Poland

0 25 50 75 100 125 0 25 50 75 100

4

Adequacy and coverage

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18-Mar-2011

What is adequacy?

•Narrow definition: absolute standard of living

•Broad definition: relative standard of living

•Analytical tools:

–income-distribution data

–simulation of pension entitlements

Income poverty

35

Old-age poverty rate,

per cent

IRL

30

AUS

MEX

25

GRC

JPN

USA

20

Old more likely

CHE

ESP

15

to be poor

PRT

FIN

BEL

ITA

TUR

10

DNK

NOR

GBR

Old less likely

SWE

FRA

DEU

5

AUT

to be poor

ISL

SVK

CAN

POL

CZE

HUN

LUX

NZL

0

NLD

0 5

Population poverty rate, per cent

10 15 20

14

18-Mar-2011

Safety-net benefits: level

New Zealand

Denmark

Canada

Netherlands

Ireland

Greece

Sweden

United Kingdom

Basic Credit S2P minimum

OECD

Australia

France

Poland

Germany

Italy

Japan

Non-contributory

United States

Contributory minimum

Hungary

0 5 10 15 20 25 30 35 40

Value of benefit, per cent of economy-wide average earnings

Safety-net benefits: recipiency

Greece

Australia

Portugal

Denmark

Sweden

Finland

France

Italy

Spain

Canada

OECD

Ireland

United Kingdom

Poland

Switzerland

Safety-net benefits

United States

Contributory minimum

Hungary

Japan

Germany

0 10 20 30 40 50 60 70 80

15

18-Mar-2011

Future (mandatory) replacement rates

125

Net replacement rate,

per cent

100

Average earner

75

50

25

0

MEX

IRL

JPN

GBR

NZL

KOR

USA

SWECAN

DEU

EST

AUS

FRA

NOR

BEL

CHE

CHL

CZE

FIN

POLOECD PRT

SVK

ITA

ISR

ESP

SVN

DNK

AUT

TUR

LUX

NLD

ISL

HUNGRC

Future (mandatory) replacement rates

125

Net replacement rate,

100

per cent

Average earner

75

50

25

0

MEX

IRL

JPN

GBR

NZL

KOR

USA

SWECAN

DEU

EST

AUS

FRA

NOR

BEL

CHE

CHL

CZE

FIN

POLOECD PRT

SVK

ITA

ISR

ESP

SVN

DNK

AUT

TUR

LUX

NLD

ISL

HUNGRC

125

Net replacement rate,

per cent

100

Low earner

(50% of average)

75

50

25

0

JPN

DEU

MEX

IRL

USA

SWE

GBR

POL

SVK

FRA

KOR

FIN

EST

PRT

CHL

ITA

CHE

NZL

NOR

BEL

ESP

AUS

SVN

OECDCAN

AUT

CZE

HUN

ISR

LUX

NLD

TUR

GRC

DNK

ISL

16

18-Mar-2011

Coverage of private pensions

Sweden

Switzerland

Denmark

Netherlands

Australia

Estonia

Germany

Poland

Canada

United Kingdom

Czech Republic

United States

Hungary

New Zealand

Belgium

Ireland

Slovak Republic

Quasi-mandatory

Finland

Mandatory

Spain

Voluntary

Italy

France

Portugal

0 10 20 30 40 50 60 70 80

Percentage of working-age population

5

Conclusions

17

18-Mar-2011

General policy direction

•Balancing objectives of benefit adequacy and

financial sustainability

–challenges of crisis and ageing

–need to achieve both

•Improving the terms of the trade off

–working longer

–private pensions

–targeting

Implications for the United Kingdom

•Public scheme financially sustainable

•Retirement provision well diversified (public/

private, PAYG/funding

•Pension system provides strong work incentives

–but continuing problem of other benefit pathways into

early retirement, such as disability benefits

•Adequacy of benefits and degree of private-pension saving remain a challenge

18

18-Mar-2011

Pensions at a Glance 2011

RETIREMENT-INCOME SYSTEMS IN

OECD AND G20 COUNTRIES

Published 17 March 2011

**********************************************/els/social/pensions/PAG

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