Pension Sustainability in European Countries

Transcription

1 An Appeal to President Prodi The EC should make sure that European citizens are informed about the long-term sustainability of their pension systems Europeans are living longer, and fewer now remain in the labour force as they grow older. Many European countries have responded to these pressures by reforming their public pension systems. There is considerable uncertainty as to the effects of these reforms -- as they typically do not alter the unfunded nature of public pension arrangements -- and this uncertainty is itself costly. Not only does it undermine the credibility of public pension programmes inducing people to retire early, but it also distorts savings behaviour and capital accumulation. In order to restore the credibility of public pension programmes and induce Governments to make the right decisions, European citizens need to be informed about the long-term sustainability of their pension systems. A well-informed and open debate on the true dynamics of public pension outlays and on the long-term commitments implicit in pension programmes will force governments to make forward looking choices. It will also help in gaining support for the reforms which are required to cope with the demographic transition by making public opinion aware of the intergenerational transfers implied by pension systems as currently designed. The European Commission has a key role to play in this context. Although it cannot substitute for Governments in reforming national pension systems, it can play a unique role in imposing basic standards in the collection, use and dissemination of information on public pension arrangements. Moreover, the single market principles and the mobility of workers across national borders require that all European citizens have access to information on the state of all public pension programmes offered within the EU. Current efforts to develop better systems to monitor and forecast pension expenditure need to be coordinated across the EU Members, otherwise it will not be possible to compare the progress being made in the various countries and hence to learn from the experience of individual countries. In three areas, in particular, an urgent initiative of the Commission is warranted: 1. the harmonisation of methodologies used in the various countries to report pension outlays and forecast future pension liabilities; 2. a definition of common standards as to the frequency of expenditure forecasts and the length of the forecast horizons; 3. the development of a European household panel survey, possibly linked to administrative data, providing timely information on trends in contributors to the pension system, and on the determinants of retirement decisions.

2 MOTIVATIONS OF THESE PROPOSALS A European household panel is indispensable to monitor progress made in reforming European pensions. Many ongoing reforms make it essential to gather information on work histories and longitudinal data on earnings, marital status, health status, and disability. While long earnings histories were not needed under the old defined-benefit regimes (which were often based on the last few years of wages), many recent reforms go in the direction of defining pension amounts on the basis of the working history of individuals or on their payroll tax payments over the life cycle. Private pension funds are also experiencing a switch from final-salary benefits to average-salary benefits or even to defined contributions schemes. The reforms also tend to allow more freedom in deciding upon the retirement age. Thus, in order to develop sensible forecasts of pension outlays, one should carefully model retirement decisions. This requires having access to reliable and timely information on inflows to the pension system at least by sex, age and marital status. The comparable data available at the European level unfortunately cannot cope with all such needs at once. To give a few examples, the new European Community Household Panel (ECHP), while enhancing the information available on household and personal income, does not contain information on consumption. Neither is information on flows from and to participation and on the length of employment records provided by the ECHP. The harmonised European Labour Force Survey (ELFS) provides such transitions, but does not allow researchers to identify the retirees and the kind of pension that they receive. More broadly, none of these surveys is designed in a way to gather information on the problems of the retirees and of those to the age of retirement, e.g., on issues like the health status, the provision of social support and services to the elderly, etc A complete European survey would also make it possible to develop generational social policy accounting which is essential to highlight the redistribution involved by different pension reform options. In many European countries, public pensions play indeed an important role in providing income support to non-employed individuals in working age. A standard argument used to downplay concerns about the dynamics of pension expenditure is that pensions are improperly used as unemployment benefits. By developing consolidated social policy expenditure accounts by age, the different roles played by pensions (and other cash transfer systems) can be better isolated and assessed. Thus, a comprehensive household panel survey carried out at the European scale is essential for better policy-making in this area. Such a survey should provide information on the household and its members, economic variables (especially current work activity and job characteristics, education, employment history, private pension coverage and characteristics, sources and composition of current income, wealth), health, social networks and social support. It would also be important to be able to link the survey information to administrative records. This is the task accomplished by surveys like the HRS (Health and Retirement Survey) in the US. The HRS has a long standing history in providing essential information to understand the economic behaviour of the elderly, to monitor changes in the socioeconomic structure of the aged and to forecast social security expenditures.

3 Learning from experience requires more frequent projections and the harmonisation of forecasting techniques. There are three principles to be followed in this respect. It is, first of all, indispensable to state explicitly the assumptions used in projecting public pension outlays and try as much as possible to harmonise them. In particular, underlying economic assumptions should be consistent across countries and effort should be made to take account of cohort profiles of participation rates, earnings, unemployment rates etc. This is because simulations based on cross sections or ' snapshots of individuals at a point in time give a highly misleading account of the evolution of public budgetary costs over time. Second, some basic standards should be defined in terms of the length of the forecasting horizon (which should be at least 50 years, that is, the residual life expectancy of an individual starting to contribute to the system) and as to the frequency of forecasts, which cannot be less than 2 years. This also requires that some of the ingredients of the forecast, such as the mortality tables, should be revised at much higher frequencies. Third, forecasting techniques should be based on stochastic forecasting models of demography and the main economic variables rather than on ad hoc assumptions as to likely outcomes along with arbitrary high fertility and low fertility assumptions (for example). In particular, refinements are required in estimating survival probabilities for those aged 80 and more as current techniques do not seem to take duly into account the effects of selection of survival probabilities and hence tend to overestimate mortality rates for this age group. Current methods giving point estimates based on the best estimates of official actuaries have been shown systematically to understate growing longevity in many OECD countries. There will inevitably be errors in forecasting the future, but statistical methods exist which permit the estimation of confidence intervals around projections, and such models ought to be implemented on a consistent basis. Promoters: Fondazione RODOLFO DEBENEDETTI, Tito Boeri (Bocconi University), Axel Boersch-Supan (Director, Institute for Economics and Statistics - Universitaet Mannheim), Agar Brugiavini (University of Venice), Richard Disney (University of Nottingham), Franco Peracchi (University of Rome, Tor Vergata). So far have endorsed the appeal: Orazio Attanasio (University College of London) André Babeau (University of Paris-Dauphine) James Banks (Institute for Fiscal Studies, London) Charles Bean (London School of Economics) Samuel Bentolila (CEMFI Centre for Monetary and Financial Studies) Giuseppe Bertola (European University Institute and University of Turin) David Blake (Director, Pensions Institute, Birkbeck College) Richard Blundell (University College of London) Michele Boldrin (University of Minnesota and Universidad Carlos III de Madrid.) Alison Booth (Institute for Social and Economic Research University of Essex) Paolo Bosi (University of Modena) Martin Browning (University of Copenhagen) Michael Burda (Institut für Wirtschaftstheorie - Humboldt-Universität zu Berlin) Onorato Castellino (University of Turin and CeRP) CeRP (Center for Research on Pension and Welfare Policies)

4 Riccardo Cesari (University of Bologna) CESifo (Centre for Economic Studies and Institute for Economic Research - Munich) Pièrre-André Chiappori (University of Chicago) Gordon L. Clark (University of Oxford) Frank A. Cowell (London School of Economics and Political Science) Hugh Davies (Centre for Pensions and Social Insurance - Birkbeck College) E. Philip Davis (Bank of England) Didier Davydoff (Director - Observatoire de l'epargne Européenne) Daniela Del Boca (University of Turin) Juan Dolado (Universidad Carlos III de Madrid) Gosta Esping-Andersen (University of Trento and Universitat Pompeu Fabra) Christopher Flinn (New York University) Elsa Fornero (University of Turin and CeRP) Michael Forster (Head of Programme "Incomes, Poverty and Social Policy" - European Centre for Social Welfare Policy and Research, Vienna) Vincenzo Galasso (Universidad Carlos III de Madrid) Francesco Giavazzi (Bocconi University) Marek Gora ( Security through Diversity Pension Reform Leader, Poland) Jonathan Gruber (MIT) Luigi Guiso (Ente Einaudi) Michael Haliassos (University of Cyprus) Stephen Hall (Imperial College) Georges Heinrich (CEPS/Instead) Pierre Hausman (CEPS/Instead) Jose A. Herce (FEDEA and Universidad Complutense of Madrid) Alberto Holly (DEEP - University of Lausanne) Robert Holzmann (Director, Social Protection - The World Bank, and University of Saarland) Andrew Hughes Hallett (University of Strathclyde) Andrea Ichino (European University Institute) Institute of Economics at the University of Copenhagen Tullio Jappelli (CSEF - University of Salerno) Juan F. Jimeno (Universidad de Alcalà and FEDEA) Heather Joshi (Centre for Longitudinal Studies - Institute of Education, London) Arie Kapteyn (Tilburg University) Ramon Marimon (European University Institute) Bernd Marin (Executive Director, European Centre for Social Welfare Policy and Research, Vienna) Franco Modigliani (MIT) Paolo Onofri (University of Bologna) Mike Orszag (Centre for Pensions and Social Insurance - Birkbeck College) Marco Pagano (CSEF University of Salerno) Marten Palme (Stockholm School of Economics) Pierre Pestieau (CREPP- Université de Liège) Christopher Pissarides (London School of Economics) Luigi Pistaferri (Stanford University) Christopher Prinz (Head of Programme "Social Welfare Modelling" - European Centre for Social Welfare Policy and Research, Vienna) Rafael Repullo (CEMFI Centre for Monetary and Financial Studies) Jean-Marie Robine (INSERM, Demography and Health, University of Montpellier 1) Gerard Roland (Université Libre de Bruxelles and ECARE) Michal Rutkowski (The World Bank, Head of Social Protection Group, Europe and Central Asia Region) Gaston Schaber (CEPS/Instead) Günter Schmaus (CEPS/Instead) Hans-Werner Sinn (CESifo Munich)

5 Peter B. Sorensen (University of Copenhagen) Peter Sturm (IMF - Research Department) Salvador Valdés-Prieto (Catholic University of Chile) Thierry Verdier (CERAS, Ecole des Ponts et Chaussées and DELTA, Ecole Normale) Juergen von Hagen (Director, Center for European Integration Studies, University of Bonn) Gert G. Wagner (DIW - Berlin, European University Viadrina and CEPS/INSTEAD) Sue Ward (Freelance Journalist) Guglielmo Weber (University of Padua) Edward Whitehouse (Director, Axia Economics, London; and Consultant Economist, The World Bank) Charles Wyplosz (Graduate Institute of International Studies) Stephen Yeo (CEO of CEPR) Geneviève Zdrojewski