Pension reform in OECD countries: Shifting tectonic plates - Nicholas Barr European Institute London School of Economics ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Pension reform in OECD countries:
Shifting tectonic plates
Nicholas Barr
European Institute
London School of Economics
http://econ.lse.ac.uk/staff/nb
Conference on Welfare and Pension Reform in Europe:
Learning from each other?
Athens, 25 June 2008Pension reform in OECD countries:
Shifting tectonic plates
1 What has happened? Shifting tectonic plates
2 What does it all mean?
3 Conclusion
Nicholas Barr, Athens, June 2008
1The backdrop
• General principles and country experience
• Do not presume to talk about Greece, but set
out a series of ideas as food for thought
• Draw heavily on Barr and Diamond (2008)
• Objectives of pension systems include
• Poverty relief
• Consumption smoothing
• Insurance
Nicholas Barr, Athens, June 2008
21 What has happened? Shifting
tectonic plates
• Plate 1: Demographic change
• Plate 2: Social change
• Plate 3: Advances in economic theory
Nicholas Barr, Athens, June 2008
31.1 Demographic change
• Two long-term trends
• Rising life expectancy
• Declining fertility
• These are more important than shorter-term
events like the baby boom
• The problem of paying for pensions would
arise even if there had been no baby boom
Nicholas Barr, Athens, June 2008
4Life Expectancy at Birth (Men)
Source: UK Government Sustainable Development, United Nations Population Division
Nicholas Barr, Athens, June 2008
5Crude Birth Rates
50
France
45
Italy
40 United Kingdom
B irth s p e r 1 0 0 0 P o p u la tio n
USA
35
30
25
20
15
10
5
0
1901 1911 1921 1931 1941 1951 1961 1971 1981 1991
Source: Mitchell, Brian R. 1998. International Historical Statistics: The Americas, 1750-1993, 4th ed. New York: Stockton Press.
Mitchell, Brian R. 1998. International Historical Statistics: Europe, 1750-1993. New York: Stockton Press.
Nicholas Barr, Athens, June 2008
6Age pyramids 2050, China, India, USA
A g e P y r a mi d f o r C h i n a , 2 0 5 0
Mal e Femal e
70+
60- 64
50- 54
40- 44
30- 34
20- 24
10- 14
0- 4
150000 100000 50000 0 50000 100000 150000 200000
P opul a t i on ( i n 0 00 's )
Sour ce: U. S. Census Bur eau, I nter nati onal Dat a Base
A ge P y r a mi d f o r I n d i a , 2 0 5 0
M al e Femal e
70+
60- 64
50- 54
40- 44
30- 34
20- 24
10- 14
0- 4
150000 100000 50000 0 50000 100000 150000
P o p u l a t i o n ( i n 0 0 0 's )
Sour ce: U.S. Census Bur eau, I nter nati onal Data Base
A g e P y r a mi d f o r U n i t e d St a t e s , 2 0 5 0
Mal e Femal e
70+
60- 64
50- 54
40- 44
30- 34
20- 24
10- 14
0- 4
40000 30000 20000 10000 0 10000 20000 30000 40000 50000
P o p u l a t i o n ( i n 0 0 0 's )
Sour ce: U. S. Census Bur eau, I nt er nati onal Dat a Bas e
Nicholas Barr, Athens, June 2008
7Public pension spending, % GDP
2000 2030 2050
Denmark 10.5 14.5 13.3
France 12.1 16.0 n.a.
Germany 11.8 15.5 16.9
Greece 12.6 19.6 24.8
Netherlands 7.9 13.1 13.6
Sweden 9.0 11.4 10.7
UK 5.5 5.2 4.4
Source: UK Pensions Commission (2004, Table D2)
Nicholas Barr, Athens, June 2008
81.2 Social change
Nicholas Barr, Athens, June 2008
9The world then
• Social policy in 1950 was based on a series
of assumptions
• Independent nation states
• Employment generally full time and long term
• Limited international mobility
• Stable nuclear family with male breadwinner and
female caregiver
• Skills once acquired were lifelong
• Though not true even then, true enough to be
a realistic basis for policy
Nicholas Barr, Athens, June 2008
10What has changed?
• Increasing international competition
(‘globalisation’)
• Changing nature of work, with more fluid
labour markets (‘post-industrialisation’)
• Rising international mobility
• Changing nature of the family
• More fluid family structures
• Rising labour-market activity by women
• Shorter half-life of skills (‘information age’)
Nicholas Barr, Athens, June 2008
111.3 Advances in economic theory
• Do consumers choose well?
• Lessons from the economics of information
• Lessons from behavioural economics
Nicholas Barr, Athens, June 2008
12Lessons from information economics
• In many areas of social policy the model of
the well-informed consumer does not hold
• In the context of pensions
• A survey, 50% of Americans did not know the
difference between a stock and a bond
• Virtually nobody realises the significance of
administrative charges for pensions
Nicholas Barr, Athens, June 2008
13Lessons from behavioural economics
• What conventional theory predicts
• Voluntary saving to maximise lifetime utility
(consumption smoothing)
• Voluntary purchase of annuities (insurance)
Nicholas Barr, Athens, June 2008
14What actually happens
• Procrastination: people delay saving, do not save,
or do not save enough
• Inertia: people stay where they are; should make
no difference whether have opt in or opt out; but
automatic enrolment leads to higher participation
• Immobilisation
• Conflicts and confusion lead people to behave passively (rabbit
in car headlight)
• Impossible to process information about 700 different funds
(90% go into Swedish default fund)
Nicholas Barr, Athens, June 2008
15Why? Recent lessons from
behavioural economics
• Experimental evidence shows high discount rate in
short run, much lower (close to zero) in long run
• Next week’s snack: 2/3 chose fruit salad, 1/3 chocolate
• This week’s snack: 1/3 fruit salad, 2/3 chocolate
• Thus people are rational for the future, but not for
the present; but when the future arrives it is the
present, so the short-term wins
• Examples: start dieting tomorrow; give up
smoking tomorrow; but when tomorrow comes ...
Nicholas Barr, Athens, June 2008
16Clinical measurement of brain
activity
• Two parts of the brain
• Mesolimbic: old part of brain: impatient – ‘eat now, won’t last’
• Prefrontal cortex: newer part of brain: patient and rational –
this is rational economic man and woman
• Life is a constant fight between the two parts
• Clinical measurement (experiments while person
is in scanner) shows that short-term decisions are
made by the mesolimbic system, longer-term
decisions by the prefrontal cortex
• These results call into question the simple model
of long-term rationality
Nicholas Barr, Athens, June 2008
172 What does it all mean?
• Implication 1: Later retirement
• Implication 2: A non-contributory basic
pension to provide poverty relief
• Implication 3: Simple pensions to provide
consumption smoothing
Nicholas Barr, Athens, June 2008
182.1 Later retirement
• Why? Because of demographic change
• The good news
• There is no ‘ageing problem’, nor a ‘pensions crisis’
• People are living longer – the great untold good news
story; not a problem but a triumph
• The problem: longer life + constant or
declining retirement age creates problems of
pension finance
• The solution: pensionable age should rise in a
rational way as life expectancy increases
Nicholas Barr, Athens, June 2008
19The economic logic of the argument
• Goods and services consumed by pensioners
have to be produced by workers
• If the number of workers goes down and the
number of pensioners goes up, solutions
include
– More workers (higher fertility or more
immigration); or
– Workers consume less (higher contributions); or
– Pensioners consume less
• Lower average pension
• Fewer pensioners
Nicholas Barr, Athens, June 2008
20The UK as an illustration
Life course, men retiring in 1950 and 2004
1950 14.1 53.1 10.8
2004 16.2 47.6 20.1
0 10 20 30 40 50 60 70 80 90
Education, work and retirement
Nicholas Barr, Athens, June 2008
21Also more flexible retirement
• Mandatory full retirement made sense
historically, but no longer
• Increased choice about when to retire, and
whether fully or partially is desirable for its
own sake
Nicholas Barr, Athens, June 2008
22Country examples
• USA: age for full pension of 65 (men and women)
rising over time to 67
• UK: state pensionable age for 65 (men and women)
will rise to 66 in 2024 and thereafter by one year
each decade
• Norway: retirement age is already 67 (men and
women)
• BUT: though retirement age should rise, it should
be increased slowly and with long advance warning
Nicholas Barr, Athens, June 2008
232.2 A non-contributory basic pension
to provide poverty relief
• Why? Because of social change
• More diverse patterns of work: thus there are problems for
coverage of contributory benefits tied to employment
• Increasingly fluid family structures: thus there are problems
basing women’s benefits on husbands’ contributions
• And because greater understanding of targeting
suggests that benefits based on age will be well
targeted without the need for an income test
• Both sets of arguments point to universal benefits
as a device to
• Extend coverage of poverty relief
• Improve gender balance
Nicholas Barr, Athens, June 2008
24Arguments for a non-contributory
basic pension (1)
• Coverage:
• Contributory principle assumed workers with long, stable
employment. History has not sustained this argument
• Universal benefits can cover everyone, including women,
informal workers, etc.
• Distribution:
• Avoids tendency of contributory benefits to create low-quality
jobs
• Avoids tendency to be regressive
• Adequacy: capable of providing poverty relief
Nicholas Barr, Athens, June 2008
25Arguments for a non-contributory
basic pension (2)
• Targeting: age is a useful indicator of poverty
• Incentives for work and saving: better than with
income-tested benefits
• Broader social benefits: universal benefits
• Can contribute to family solidarity
• Can improve access to other services, e.g. health
• Adjusting to fit a budget envelope: 3 instruments
• Size of the pension
• Age at which pension is first paid
• Perhaps also an affluence test
Nicholas Barr, Athens, June 2008
26Country examples
• UK: illustrates problems of coverage
• OECD countries with non-contributory basic
pensions
• The Netherlands
• New Zealand
• Australia (which has an affluence test)
• Other examples of actual or proposed non-
contributory basic pensions
• Chile: non-contributory with affluence test
• South Africa: reform currently being discussed
Nicholas Barr, Athens, June 2008
272.3 Simple pensions to provide
consumption smoothing
• Why? Lessons from the economics of information
and behavioural economics
• The usefulness of the model of competition and
rational consumer choice should not be overstated
• Incentives to voluntary saving will not be fully effective
• Education is an incomplete solution
• Competition does not act to reduce charges by pension
providers
Nicholas Barr, Athens, June 2008
28Implications for policy design
• Behavioural economics suggests
• Keep choices simple, i.e. a few schemes, or perhaps only a
single scheme, to avoid immobilisation
• Design policy so that people commit now for action in the
future. This makes use of procrastination to assist policy
• Make membership mandatory or use auto enrolment: the latter
makes use of inertia to assist policy – once auto enrolled most
people will stick
• Transactions costs imply
• Account administration: centralised in respect of (a) collection
of contributions (b) account administration
• Fund management: wholesale, private
Nicholas Barr, Athens, June 2008
29Model 1: simple private pensions
• Mandatory membership or auto-enrolment
• A small number of simple choices
• In this model, highly constrained choice is a deliberate and
welfare-enhancing design feature
• But one of the options can be to allow individual choice (Marks
and Spencer or Saville Row)
• Decouple fund administration from fund
management
• Centralised administration
• Fund management: wholesale, competitive, e.g. PPO-type
mechanism
Nicholas Barr, Athens, June 2008
30Country examples
• The US Thrift savings plan (www.tsp.gov):
small number of simple funds, central
administration, voluntary
• Sweden: large number of funds, central
administration, mandatory
• UK simple Personal Accounts: small
number of simple funds, central
administration, auto-enrolment
Nicholas Barr, Athens, June 2008
31Model 2: a state-organised notional
defined-contribution scheme
• Mimics individual funded accounts, but on a Pay-
As-You-Go basis
• From the point of view of worker, mandatory and
simple; and administration centralised
• But makes significant demands on government
capacity, since requires the ability to maintain
contribution records over a full working life
• NDC or funded accounts? Solid economic
principles for informing the choice (Barr and
Diamond 2006, 2008)
• Country examples: Sweden, Poland, Latvia
Nicholas Barr, Athens, June 2008
323 Conclusion
Nicholas Barr, Athens, June 2008
33Designing benefits
• Demographic change, social change, advances in
economic theory and recent country examples
provide food for thought, in particular
• A universal basic pension to provide poverty relief
• Simple, administratively cheap earnings-related
pensions (private or NDC) with highly constrained
choice as a deliberate design feature
• Later retirement
Nicholas Barr, Athens, June 2008
34References
Barr, Nicholas (2004), The Economics of the Welfare State, 4th edn, Oxford:
Oxford University Press and Stanford, Calif.: Stanford University Press.
Barr, Nicholas (2006), ‘Pensions: Overview of the Issues’, Oxford Review of
Economic Policy, Vol. 22. No. 1, pp. 1-14.
Barr, Nicholas and Diamond, Peter (2006), ‘The Economics of Pensions’, Oxford
Review of Economic Policy, Vol. 22. No. 1, Spring, pp. 15-39.
Barr, Nicholas and Diamond, Peter (forthcoming, 2008), Reforming pensions:
Principles and policy choices, New York and Oxford: OUP.
Beshears, John, Choi, James, Laibson, David, and Madrian, Brigitte (2008). ‘The
Importance of Default Options for Retirement Saving Outcomes: Evidence
from the United States’, in Stephen J. Kay and Tapen Sinha, editors, Lessons
from Pension Reform in the Americas, pp. 59-87. Oxford: Oxford University
Press.
UK Pensions Commission (2004), Pensions: Challenges and Choices: The First
Report of the Pensions Commission, London: TSO, downloadable from
http://www.pensionscommission.org.uk/publications/2004/annrep/index.asp
UK Pensions Commission (2005), A New Pension Settlement for the Twenty-First
Century: Second Report of the Pensions Commission, London: TSO, 2005,
downloadable from http://www.pensionscommission.org.uk
US Thrift Savings Plan (http://www.tsp.gov)
Nicholas Barr, Athens, June 2008
35You can also read
