Press
Release ECE/GEN/99/29
Geneva, 14 December 1999
CAN WE AFFORD TO GROW
OLD?
POPULATION AGEING AND PENSIONS REFORM
United Nations Economic Commission for Europe releases
its latest 1999 Economic Survey of Europe
Against the background of a
steady stream of alarmist press headlines warning of a "demographic time bomb",
of a "pensions crisis" threatening to "squeeze European budgets", and
of the "frightening" implications for tax rates of maintaining tomorrow’s
retirees at the same standard of living of today’s pensioners, the United Nations
Economic Commission for Europe (UN/ECE) brought together some of the top experts on
pension reform to discuss in a calmer and less excitable manner the implications of ageing
populations.
The Seminar attracted a large audience of
high level experts, many of them directly involved in the reform of pensions in their own
countries. The lead speakers were Lord Eatwell, President of Queens College Cambridge and
member of the UK House of Lords; Professor Lawrence Thompson, Senior Fellow at the
Urban Institute, Washington D.C., and a former Principal Deputy Commissioner of the U.S.
Social Security Administration; and Professor Maria Agusztinovics of the Hungarian
Academy of Sciences who is one of the best known experts on the subject in Central Europe.
In addition, Jean-Michel Charpin, Commissaire Général au Plan and author of the
recent report on reforming the French pension system, chaired a panel of experts who
discussed the prospects for pension reform in the wake of the financial crises of 1997 and
1998.
This issue of the Economic Survey of
Europe contains the principal papers presented to the Seminar, together with
discussants’ comments and a summary of the general discussion.
The basic purpose of any pension system,
which is sometimes forgotten in much of the heated debates over reform, is to provide for
security in old-age and to avoid the descent of low income earners into poverty with which
cessation of employment was so frequently associated in the past. By whatever method it is
funded, the task of any pension scheme is to transfer goods and services from the current
output (GDP) produced by those in work to those in retirement. This can be done by
governments taxing today’s workers and transferring the proceeds to those in
retirement (The "Pay-As-You-Go" method); or by pensioners themselves
accumulating financial assets (claims) during their working lives which can be used to
maintain their expenditure on goods and services during their old age; or by some
combination of the two.
What has created the current problem for
pension systems (most of which are Pay-As-You-Go) is that the number of pensioners has
been increasing in relation to the numbers of workers available to produce the goods and
services demanded by the entire population. This increase in the so-called
"dependency ratio" in western Europe is largely due to the ageing of the
population – more people are living longer, and pensions must provide for much longer
periods of retirement. At present there are about 4-5 people of working age for every
person over 65 years of age in western Europe – in 40 years time the number is
projected to fall to just over 2.
Increasing life expectancy is not the only
factor behind the rise in the dependency ratio – falling birth rates, and actual
retirement at ages well below the statutory age are also significant.
Much of the public debate over pension
reform has focused not on this larger issue of inter-generational transfers but on how to
reduce the "burden" of public pensions (Pay-As-You-Go) on society by switching
to private, fully-funded schemes. Eatwell argued, convincingly for most of the
participants, that such proposals were based on a fallacy: there is in fact no difference
at all between the macroeconomic impact of PAYG and funded pension schemes. For a given
level of output and a given level of pensions, those in work must reduce their
consumption, either through higher taxes or increased savings, if pensioners are to
maintain their real expenditure on goods and services. If workers can resist higher tax
rates – which is one of the factors behind present proposals for funding – they
can also resist the pressure to make them save more; if they do resist, inflation will
reduce the real level of pensioners’ consumption and interest rates will rise instead
of taxes. Whatever system is in place, equilibrium will have to be reached between the
demands of pensioners for current goods and services and the willingness of current
workers to release them by acquiring financial assets. For this reason most of the
speakers thought that placing the argument over "Pay-As-You-Go" versus
"Fully-Funded" schemes at the centre of the pensions debate was misplaced.
In shifting the debate away from this
current focus, a number of key points emerged from the Seminar:
(i) Both the costs of switching to
fully-funded schemes and the administrative costs of running them are greatly
underestimated; and the secondary or incidental benefits of fully-funded schemes (such as
higher levels of savings and investment and faster rates of economic growth) are not
well-supported by the evidence;
(ii) More effective policies to deal with
the problem of supporting a larger population of pensioners are those which improve the
workings of the labour markets (through changes in the incentive structures created by
current tax and benefit systems) and, more generally, which encourage higher rates of
economic growth, productivity and employment; investment in education and training,
especially for the young and the unemployed is an obvious priority for all countries;
(iii) Current pay-as-you-go systems can
often be significantly improved with relatively small parametric changes (for example, in
the minimum retirement age or in contribution rates) as opposed to more radical (and
socially disruptive) reforms;
(iv) Nevertheless, on the basic principle
of spreading risks, there was also support for a multi-pillar approach to pensions: PAYG
can be supplemented by fully-funded schemes, public and/or private, by private savings,
and by increased opportunities (incentives) for those receiving a pension to continue to
work on a part-time or temporary basis;
(v) Most, not all, participants thought
that the increased volatility of international financial markets was a major concern for
fully-funded pension schemes and that their superiority over PAYG in reducing risk has not
been demonstrated.
On many aspects of the pension debate
there is still a wide dispersion of views and experience, but these broad conclusions were
supported by most of those attending the Seminar. There was general agreement on the need
for a pragmatic, measured and cautious approach to reform, not only because of the
complexities involved in any change but also because of the political and social
sensitivity of any alteration, actual or perceived, in pension rights. But the positive
message of this Seminar is that if sensible reforms are pursued over a wide area, and not
just focused on a single variable such as contribution or tax rates or the
retirement age, then there is no need to scare the present work-force with stories about
whether they can afford to grow old. Fear is not always the best way to build popular
support for reform which to be successful must be based on a broad social consensus.
Further information can be
obtained from:
Paul Rayment
Economic Analysis Division
United Nations Economic Commission for Europe (UN/ECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: +(4122) 917 27 18
Fax: +(4122) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm