VULNERABILITY OF SOCIAL INSTITUTIONS 2 December 2014 Paris Seminar in Demographic Economics Falilou FALL Senior Economist OECD Economics Department 1
Introduction and outline Social institutions and the crisis Institutional design influences their vulnerabilities country specificities The scope of the analysis: pension, health care and unemployment insurance (UI) Balance between sustainability and adequacy 2
Outline Framework Trend and long run changes: Ageing Productivity Macroeconomic shocks Policy recommendations 3
The framework Shocks Sustainability Reforms - Adequacy Shocks Adaptive and recovery capacity Risk prevention Impact on promises and costs of meeting them What are the critical drivers of vulnerabilities and the sensitivity to risks? How do the different shocks affect the sustainability of social institutions? Institutional capacity to cope with shocks and risks Adequacy and impact of reforms 4
Ageing Long-term risks and trends and their effects on social institutions Figure 1: OECD old-age support ratio will decrease from 4.2 currently to 2.1 in 2050 12 10 Difference 2050-2010 2050 8 6 4 2 0 Source: OECD (2013), Pensions at a Glance 2013 5
Ageing and health care systems Figure 2: Health status in old age affects public health care spending 16 Baseline Morbidity compression Morbidity expansion 14 12 10 8 6 4 2 0 Source: OECD calculations and de la Maisonneuve and Oliveira Martins (2013). 6
Ageing and pension systems Figure 3: Public pension expenditure projections 20 18 2010 2050 16 14 12 10 8 6 4 2 0 Source: OECD (2013), Pensions at a Glance 2013 7
The impact of a longevity shock on a PAYG defined benefit scheme Figure 4: Simulation of the impact of a longevity shock on DB scheme Source: OECD simulations 8
Figure 5. The impact of the longevity shock on a DC scheme Difference with respect to the baseline scenario 9
Ageing, social spending and fiscal consolidation Figure 6: The impact of future health and pension spending on consolidation needs Source: Cournède, B. et al. (2013), Pensions at a Glance 2013 and de la Maisonneuve and Oliveira-Martins (2013). 10
Productivity developments and social institutions Health spending, price and technology developments Figure 7: Price and technological developments affect the public health spending-to-gdp ratio Source: de la Maisonneuve and Oliveira Martins (2013). 11
Productivity changes and pension schemes Figure 8: The effect of a productivity growth slowdown on a DB scheme Source: OECD simulations 12
Figure 9. The effect of the productivity shock on a point DC scheme (Difference with respect to the baseline scenario) 13
Figure 10: Social spending during the crisis Per cent change in real general government social expenditures, 2007-08 to 2012-13 50 ME KOR 40 CHL 30 20 10 ESP PRT SVN ITA ISL JPN IRL FIN GBR NOR LU NLD BEL FRA EST DNK AUT CZE USA SVK NZL CAN CHE SWE AUS POL ISR 0 DEU GRC HUN -10-25 -20-15 -10-5 0 5 10 15 20 25 Per cent change in real GDP, 2007-08 to 2012-13 14
Macroeconomic shocks and unemployment insurance Figure 11: Evolution of the NAIRU during the crisis 4 2 0-2 Change in Nairu 2006-08 -4 Change in Nairu 2009-12 -6-8 Source: EO93 database, OECD Social Expenditure database, OECD calculations. 15
Figure 12: Unemployment rate and volatility Source: EO93 database, OECD Social Expenditure database, OECD calculations. 16
Figure 13: Unemployment insurance spending elasticity to unemployment 3 2 1 0-1 -2-3 12 Figure 14: Spending asymmetries over the cycle 8 4 0-4 -8 Source: EO93 database, OECD Social Expenditure database, OECD calculations. 17
Overcoming vulnerabilities of pension systems Pension schemes, ageing and risks (interest rate, asset price and longevity). Pension reform levers : retirement age, contribution rate and pension rate. Adjusting key parameters automatically to life expectancy. Widening the coverage of voluntary private pensions as a complement to public pensions. Figure 15: Poverty among older people (2010, people older than 65 years ) 50 45 40 All 65+ Whole population 35 30 25 20 15 10 5 0 Source: OECD Income Distribution and Poverty Database. 18
The impact of increasing the retirement age from 60 to 65 on the DB scheme 19
The impact of increasing the retirement age from 60 to 65 on the point scheme 20
The impact of an up-rating reform The simulation results should be compared with the longevity shock scenario (Figure 10) 21
Automatic adjustment mechanisms to ensure the sustainability of pension schemes Link of pension benefit to life expectancy Pension valorisation and indexation Retirement age Contribution rate Australia Canada Chile Czech Republic Denmark Estonia Finland France 1 Germany Greece Ireland Israel Italy Japan 2 Mexico Netherlands 3 Norway Poland Portugal Slovak Republic Sweden United Kingdom United States 22
NLD LU FRA IRL GBR USA USA DEU CZE DNK CAN NZL JPN NOR AUT SWE ISL AUS BEL FIN TUR ITA ESP PRT POL HUN SVK CHE KOR GRC ME Overcoming vulnerabilities of health care systems Health care spending drivers : ageing, price and technology developments. Policy options for reducing spending: higher cost sharing and tax incentives for private health insurance curb public spending, but worsen adequacy. Supply side policies: regulated competition, well-designed budgetary caps, hospital payments (diagnostic related groups and health technology assessments). Greater efficiency and spending savings. 3.5 3 2.5 2 1.5 1 0.5 0 Figure 16: Degree of cost sharing Source: OECD Survey on Health System Characteristics 2008-09. 23
Overcoming vulnerabilities of unemployment insurance (UI) Generous benefits can lead to large spending spikes. Unemployment insurance adequacy in crisis times. Effective activation policies can increase UI efficiency. Contingency plans to adjust policies during crises should be in place. Figure 17: The responsiveness of active labour market policies to unemployment Unemployment, per cent change 2007-10 300 250 EST 200 IRL 150 ESP 100 50 0 USA DNK NZL CAN CZE PRT ME SWE LU HUN ITA SVK AUS JPN CHE NLD BEL FRA ISR AUT POL FIN SVN KOR DEU 45 o -50-50 0 50 100 150 200 250 300 350 400 ALMP expenditure scaled by GDP per capita, per cent change 2007-10 Source: OECD Social Expenditure Database. 24
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ADDITIONAL MATERIALS
The patterns of the coverage of unemployed by unemployment insurance 120 100 80 60 40 20 0 Duality (right axis) Eligibility strictness (right axis) Duration (right axis) Coverage (left axis) 40 35 30 25 20 15 10 5 0 27
The vulnerability of public health spending to GDP shocks is modest in most countries Health care spending as % of GDP 18 2060 17 16 15 14 13 12 11 10 9 8 7 6 5 18 17 16 15 14 13 12 11 10 9 8 7 6 5 28
Average real net investment return of pension fund assets Turkey (1) Poland Estonia Portugal Chile Austria Greece Finland Belgium Slovak Republic Israel Japan (2) Italy United Kingdom Spain Luxembourg Slovenia Simple average Sweden Hungary Norway Korea Weighted average Czech Republic Switzerland Germany Mexico (1) Canada New Zealand (3) Iceland Netherlands (4) Australia (3) Denmark Dec 2010 - Dec 2011 Dec 2011- Dec 2012-15 -10-5 0 5 10 15 29