Pensions at a Glance 2017

OECD

• Publisher: OECD
• Year: 2017
• eBook ISBN: 9789264287518
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Chapter 1. Recent pension reforms1

This chapter looks at pension reforms in OECD countries over the past two years (between September 2015 and September 2017). Most OECD countries have enacted pension reforms since the last publication of Pension at a Glance. However, the reforms have been fewer and less widespread than in previous years with one-fifth of OECD countries taking no policy action. Among the most common reforms are changes in benefits and contributions. In addition, retirement ages are being adjusted in the majority of OECD countries. However, some of these adjustments are a reversal of previously legislated retirement age increases.

1.1. Introduction

In the last few years the pace of pension reforms across the OECD countries has slowed. After the financial crisis and the subsequent sovereign debt crisis in Europe, pension reforms were plenty and widespread, as documented in previous editions of Pensions at a Glance.2 However, even taking into account the progress that has been made, concerns about the financial sustainability and pension adequacy of the current state of pension systems in OECD countries remain.

Continued ageing of societies combined with the changing nature of work puts pressure on both the financial sustainability and the retirement income adequacy of pension systems; in addition, risks of increasing old-age inequality have been building up (OECD, 2017). At the same time, the momentum for far reaching pension reforms might be dwindling. After a decade of stress, improved government finances, potential pension reform fatigue as well as politically volatile times and rising populism are slowing the pace of reform.

Public expenditure on pensions as a percentage of GDP has increased and is expected to rise further in the near future in most OECD countries. For the OECD as a whole, public pension expenditure rose by about 2.5% of GDP since 1990. Currently, Greece and Italy already spend more than 15% of GDP on pensions. However, long-term prospects have improved and the projected pace of spending growth has slowed substantially (see indicators 7.3 and 7.5 in this publication; Fall and Bloch, 2014; European Commission, 2015).3 At the same time, recent reforms will lower replacement rates in many countries due to measures aimed at improving pension finances. This may jeopardise the adequacy of retirement income in some countries, especially for retiring low-skilled and low-paid workers. The long term need to reform is still present in many countries, especially given the ongoing improvements in longevity.

The challenges for financial sustainability and pension adequacy generally call for bold action by policy makers. To keep defined benefit systems financially sustainable a number of measures can be taken. Contributions can be raised, initial benefits can be cut and indexation of pensions in payment can be limited. These measures have been taken in many countries. In many European countries, for example, replacement rates are projected to decline while the financial balance of pension systems is projected to improve in coming decades (European Commission, 2015). Higher contributions might improve financial sustainability and/or pension adequacy but it raises non-wage costs, which in turn may affect net wages and employment depending on how the labour market adjusts over time. In countries where pension contribution rates are low, lower net wages might be acceptable to workers if this preserves or raises retirement income levels in the future.4 By contrast, cutting benefits and limiting indexation endangers pension adequacy, in particular in countries which are already facing low pension income prospects. Against this background, raising the retirement age can be a win-win proposition: it increases the labour force participation of older workers and helps maintain pension levels, at least for those who can actually work longer.

To maintain retirement income adequacy a number of measures can be taken. Apart from raising contributions resulting in higher entitlements, coverage of mandatory schemes can be increased. In most OECD countries, however, there are limits to this strategy since coverage levels among the employed population are already very high. Only countries with a relatively large informal economy can significantly increase pension coverage, but this will require policy packages which extend far beyond pension policies. However, coverage can also be extended to groups that are not systematically covered, such as the self-employed. Moreover, coverage of voluntary private pensions can still be improved in many countries. Adequacy concerns can also be addressed by raising the level of basic and minimum pensions, possibly in combination with relaxing eligibility criteria for such pensions, albeit at a cost and potential risks for financial sustainability.

The changing nature of work in the context of population ageing highlights the importance of continuing to improve pension systems. Most ...

Table of contents

• Title page
• Legal and rights
• Foreword
• Editorial: Flexibility or the comeback of early retirement?
• Executive summary
• Chapter 1. Recent pension reforms
• Chapter 2. Flexible retirement in OECD countries
• Chapter 3. Design of pension systems
• Chapter 4. Pension entitlements
• Chapter 5. Demographic and economic context
• Chapter 6. Incomes and poverty of older people
• Chapter 7. Finances of retirement-income systems
• Chapter 8. Private pensions and public pension reserve funds
• About the OECD