Methods of Organizing Pensions

Transcription

1 Outline Methods of Organizing Pensions Efficiency Arguments Social Justice for all? Distributive Impacts Assessment Challenges facing Pension Systems Reforming Social Security Turkish Pension System

2 Methods of Organizing Pensions Purely economic perspective consumption smoothing; either store current production for future use or acquire a claim for future production save today (funded) or obtain a promise (PAYG). - Funded Schemes: contributions invested in financial assets and the return credited to members - Defined Contribution (DC): lump-sum - Defined Benefit (DB): annuity at retirement - PAYG: tax working population to pay for pensions of retired generation

3 PAYG Methods of Organizing Pensions (+) minimize impediments to labour mobility; full pensions could be build up quickly; protect pensions against inflation (-) sensitive to age structure of the population; makes pensioners dependent on the future workforce Funded Schemes (+) insensitive to changes in age dependency ratio; sufficient resources to pay the pensions (-) DB occupational schemes favour long-serving workers; hard to build up full pensions; inflation Inflation DC schemes cope during building up of pension rights but cannot cope with unanticipated post-retirement inflation PAYG state can guarantee indexed amounts

4 Public vs. Private Efficiency Arguments Private pensions are provided efficiently if std. assumptions hold perfect info, perfect competition, no market failures No problem of moral hazard and adverse selection BUT inflation! Consumption smoothing implies the real value valid only when private insurance is provided against unanticipated inflation uninsurable risk! Private can offer limited indexation, protection beyond that must come from government State should intervene to hedge for the costs of unanticipated inflation once pensions are in payment introduce PAYG into funded schemes

5 Funded vs. PAYG Efficiency Arguments Demographic problem ageing populations Economic function of pension schemes divide total oupput between workers and pensioners Simple model both schemes function well with constant output per capita, workforce, real wages, nominal pensions. Decline in the workforce? If large accumulation of pension funds, total savings decline consumption of pensioners > saving by workforce ;=> demand inflation!

6 Efficiency Arguments Funded vs. PAYG relaxing the assumptions Changes in productivity and LFP are independent from the method of finance Funded and PAYG are same Only decline in output matters Other concerns - Safety: PAYG pensioners more dependent on younger workers + battle over shares of output - Liberty: libertarian argument against taxation - Fiscal/financial discipline: future liability, changing economic and social circumstances.

7 Redistribution Social Justice for all? From Young to Old PAYG: possible but not inevitable; Funded: if stable prices, impossible. From Rich to Poor occur with PAYG; use of formula redistribution but partially offset by differential mortality. Not possible for voluntary funded schemes. From Men to Women e.g. lower retirement ages for women than men equity concerns Over the Life Cycle larger fraction of funded schemes

8 Risk Sharing Social Justice for all? Funded DC (individual accounts) worker; altering by government guarantees DB (employer provided) employer unless bankruptcy; may spread risks PAYG (mandatory social insurance) contributors (i.e. Current working generation) General Revenue/Contribution Financed taxpayers/contributors

9 Distributional Issues National? Need to be compulsory for people to belong to a scheme at least at minimum; efficient when consumption is reallocated across life course. Role for public provision at least for indexation of assets for funded schemes Optimal? State intervention => relative certainty; private provision has problems with imperfect consumer information Actuarial? not necessarily not geared to risk, not funded, rights to benefit not necessarily determined by the occurance of the insured event.

10 Incentive Issues Savings and Economic Growth Higher with funded schemes than PAYG not necessarily Links are related with macroeconomic effects! Labour Supply Potential distortions on (i) retirement decisions should be related to the individual contributions (ii) labour market responses in the early life important if contributions bear a fully actuarial relationship to benefits. Design of the pension and the economic welfare impacts are important

11 Challenges Facing Pension Systems Demographic challenges and labour market participation Review of pension systems in OECD - First tier (public provided, mandatory): safety net to prevent old-age poverty; social assistance, targeted retirement-income programmes, basic pensions, minimum pensions - Second tier (insurance/savings): adequate replacement rate for a std. of living; mandatory, mix of public and private schemes; DB, DC, NDB

12 Challenges Facing Pension Systems Responses to challenges Pension Reforms - Changes in the number of years used in benefit calculation - Changing the valorization of past earnings - Changing the indexation of pensions in payment - Linking pensions to higher life expectancy - Increasing pension eligibility age - Increasing the reward for continuing work - Introducing mandatory DC plans => Rebalancing of responsibility for pension provision between the public and private sectors; rebalancing of risks towards individuals

13 Reforming Social Security

14 Analytical Errors Reforming Social Security - Tunnel vision: inadequate attention to gender balance, poverty relief etc. - Improper use of first-best: need not to minimize distortions (e.g. poverty); would competition do good? - Improper use of steady-state: long-run outcome ignoring the steps to get there - Incomplete analysis of pension debt: narrow focus - Incomplete analysis of the effects of funding: financial flows, ways of generating funding, redistribution

15 Reforming Social Security Implications for Policy Design - no single best pension design - avoid excessive implicit taxes - earlier retirement have little impact on reducing unempl. Finance and funding - depending on the fiscal cost - Move from PAYG to funded? Implementation - Fiscal capacity - Government as an essential participant - Capacity of private sector - Capacity of consumers - Voluntary component?

16 Illustrative Cases Reforming Social Security Low-income country 1st tier: limited poverty relief, rely on other arrangements 2nd tier: no capacity to manage mandatory earningsrelated system 3rd tier: simple, reliable opportunity for voluntary savings Middle-income country 1st tier: either non-contributory, tax-financed or simple contributory PAYG 2nd tier: either publicly organized, earnings-related, DB or DC as a part of a national fund 3rd tier: voluntary DC pensions at firm or individual level

17 Illustrative Cases Reforming Social Security Developed country 1st tier: either non-contributory tax financed or a contributionary for poverty relief 2nd tier: several alternatives (or combination of some) - publicly organized DB - administratively cheap savings plan - mandatory, funded, DB, industry sponsored - funded, DC 3rd tier: voluntary DC organized either at the firm, indiviudual or industry level

18 Reforming Social Security Moral of the story so far: - Root causes are long-run trends - Diversity across systems in terms of purposes, institutional setting, constraints, priorities etc. - Options vary as constraints relax For improvement of finances, need to - increase contribution rates - decrease benefit levels - postpone retirement - increase savings for increasing national output

19 Turkish Pension System Prior to 2006 three seperate social security institutions operating on PAYG schemes catering for different occupational groups with different eligibility and entitlement criteria: SSK, ES, BK Serious attempts for reform mostly IMF/WB induced; pointing to the fiscal concerns about deficits/unsustainability First reform wave in 1999, changes in parameters and introduction of voluntary pensions as a complementary tie Second wave much debated in AKP period, legislated in 2006; administrative unification of three institutions under SGK Social Security Institution and single formula

20 Turkish Pension System Maintainance of persistent inequalities across different schemes, over the generations, between women and men. Basic pension? Law on 2022 minimum pensions paid to those over 65 without any social security coverage. Benefit payment is the least amount accross OECD, entitlement involves discretion. Considering the prevalence of informal employment in the labour market, more likely to account for the income guarantee aspect of 2022 pension.

21 Turkish Pension System Tablo 1.1- Sosyal Güvenlik Kapsamı (5510 Sayılı Kanunun 4-1/a, 4-1/b, 4-1/c Maddesi Kapsamında), Table 1.1- Social Security Coverage [Under Article 4-1/a, 4-1/b, 4-1/c of Act 5510], Yıllar- Years SOSYAL GÜVENLİK KAPSAMI SOCIAL SECURITY COVERAGE I- Aktif sigortalılar- Insured Persons 1- Zorunlu- Compulsorily Insured 2- Çırak- Apprentices 3- Yurtdışı topluluk- Collective insurance 4- Tarım (4-1/a)- Insured in agricultural sector 5- Tarım (4-1/b)- Insured in agricultural sector 6- Muhtar- Demarch 7- İsteğe bağlı- Voluntarily insured 8- Kısmi süreli çalışanlar- Insured working part-time II- Pasif (Aylık alan) sigortalılar- Pensioners Dosya- File Kişi- Person 1- Yaşlılık- Old-age 2- Malullük- Invalidity 3- Vazife malulü- Service-Disabled 4- Ölen sigortalı (Dosya)- Death (Active file) 5- Ölen sigortalıların haksahipleri- Survivors (Widow, orphan, mother and fathers) 6- Sürekli iş göremezlik geliri alan- Receiver of permanent incapacity income 7- Sürekli iş göremezlik ölüm geliri (Dosya) Death income due to permanent incapacity (File) 8- Sürekli iş göremezlik ölüm geliri alanlar Survivors receiving permanent incapacity income III- Bağımlılar- Dependents Aktif / pasif oranı- Rate of insured/pensioner ,374,631 18,352,859 18,886,989 15,453,320 16,501,281 17,129, , , ,730 32,867 34,600 34, ,911 85,717 62,988 1,121,777 1,056, ,454 12,559 11,452 10, , , ,333 60, , ,521 9,274,682 9,635,709 9,893,634 10,014,982 10,382,419 10,595,966 6,816,806 7,065,881 7,284, , , ,320 6,711 6,858 6,921 2,233,921 2,340,001 2,376,354 2,944,768 3,057,453 3,049,522 58,979 60,657 61,467 48,883 50,071 52,536 78,336 79,329 81,700 36,348,316 33,807,725 32,939, IV-Özel sandıklar- Funds 350, , , Aktif sigortalılar- Insured 2- Aylık alanlar- Pensioners 3- Bağımlılar- Dependents 4- Aktif / pasif oranı- Rate of insured/pensioner 119, , ,825 84,890 86,103 87, , , , Türkiye nüfusu (TÜİK ADNKS)- Population of Turkey 74,724,269 75,627,384 76,667,864 Sosyal güvenlik kapsamı (I+II+III+IV)- Social security coverage 64,088,819 62,899,043 62,789,365 Sigortalı nüfusun Türkiye nüfusuna oranı (%)- Rate of insured population Kapsam dışı nüfus oranı (%)- Rate of unregistered insured population PRİMSİZ ÖDEMELER (FATURALI ÖDEMELER) BILLED PAYMENTS 2022 Sayılı Kanuna göre aylık alanlar- The pensioners within law no of Yaşlılık- Old-age 2- Malullük- Invalidity 3- Sakatlık- Disability 4-18 Yaş Altı Sakat ve Malul- Invalid or disabled persons under 18 years 5- Özürlü Silikozis Hastaları- Silicosis patients with disabilities 86.0% 83.0% 81.9% 14.0% 17.0% 18.1% 1,337, , , ,141 Diğer Kanunlara göre aylık alanlar ( )- The pensioners within other laws 49,158 48,550 47, Kore Gazisi- Korean War Veteran 5,181 4,745 4, Vat. Hiz. Ter **- Patriotic Services Kıbrıs Gazisi- Cyprus War Veteran 30,575 30,200 29, Haksahipleri- Survivors (Widow, orphan, mother and fathers) 13,097 13,243 13, sk Ek 79 mad. göre Tütün İkramiyesi- Tobacco bonus 40,185 37,951 38,438 Genel Sağlık Sigortası Kapsamında Tescil Edilenler*** Number of registered under the General Health Insurance Genel Sağlık Sigortası Primleri Kendileri Tarafından Ödenenler Person who General Health Insurance premiums paid by themselves Genel Sağlık Sigortası Primi Devlet Tarafından Ödenenler Person who General Health Insurance premiums paid by state 59, ,865,470 11,357,306 12,351,352 * 3,798,485 4,699,867 7,558,821 7,651,485