In response to escalating
pension expenditures, an increasing number of countries across the development
spectrum are evaluating the sustainability of old-age social insurance systems.
Expenditures in today's 25 EU countries consumed one-eighth of gross domestic
product in 2003 (Figure 12). In the future, the economic well-being of older
populations will depend on a combination of income sources—earnings from continuing
to work, social insurance programs, occupational pensions, and private savings.
Public policies affect each of these sources, and proposed policy reforms have
both costs and benefits. More empirical research, including cross-national comparative
research, is needed to inform the development of policy.
Note: Pensions include old-age,
anticipated old-age, partial, and disability benefits, as well as early retirement
benefits due to reduced capacity to work.
Source: European Statistical
System (EUROSTAT). Available at: http://epp.eurostat.ec.europa.eu. Accessed
January 8, 2007.
Many countries already have
taken steps toward reforming their old-age social insurance programs (see box
on “The Chinese Experience: Rethinking Social Security in an Emerging market
Economy”). One common reform has been to raise the age at which workers are
eligible for full public pension benefits. In 1983, the United States changed
the age at which workers are eligible for full retirement benefits to increase
incrementally beginning in 2003. Japan raised the pension age for men from 60
to 65 and for women from 57 to 65 in the past 15 years. The highest current
statutory pensionable age is 67 for workers in Norway and Iceland. Increases
in pensionable age have focused on women, who as recently as the early 1990s
were entitled to draw pensions at a younger age than men in most countries.
About 60 percent of countries now have the same pensionable age for both men
and women. While the trend is to raise the pensionable age, nearly one-third
of African countries that offer social insurance benefits to their older populations
have a life expectancy less than the statutory pensionable age for men and,
in most cases, also for women.
Another strategy for bolstering
economic security for older people has been to increase the contribution or
tax rate on workers. Twenty-four countries (two-thirds of which are in Europe
) now have payroll tax rates that equal or exceed 20 percent of wages. While
payroll taxes raise needed revenues, they have the potential to discourage work
in the formal sector. Other measures to enhance income for older people include
new financial instruments for private savings, tax incentives for individual
retirement savings, and supplemental occupational pension plans. Eight countries
already have chosen to make occupational pension plans mandatory.
Sixteen countries, primarily
in Asia and the Pacific, have a Provident Fund, a compulsory savings program
that is funded fully with investments typically managed by the government. Most
existing Provident Funds were established in the 1950s; very few have been established
since 1985. Instead, countries wishing to achieve a closer link between contributions
and benefits have adopted some form of individual accounts. Chile , in the early
1980s, was the first to introduce individual accounts as part of a defined contribution
plan. More than 20 other countries, mostly in Europe and South America , have
since followed suit. In some countries, however, individual accounts are notional—in
other words, no real accumulation of wealth exists because workers' contributions
fund existing pension obligations. Depending on their design, individual retirement
accounts may be risky for account holders who make uninformed decisions about
diversification.
A trend toward defined contribution
plans (in which employees contribute a portion of earnings, sometimes with matching
contributions from employers, into investment accounts that they control) rather
than defined benefit plans (in which employers guarantee specified levels of
pension payments in the future) is evident. Among private-sector workers covered
by an occupational pension plan in the United States , 40 percent were in a
defined benefit plan in 2000, down from 84 percent in 1980. In contrast, the
number of workers in defined contribution plans increased nearly fivefold from
1975 to 1998. In the private sector, the popularity of defined contribution
plans is not driven by population aging but by increased job mobility, global
competition, and the growth in the number of smaller firms. An important question
concerning this trend is whether defined contribution plans, which shift risk
and decisionmaking to the employee, will provide adequate income security for
the duration of retirement.
The Chinese Experience:
Rethinking Social Security in an Emerging Market Economy
Although China is rapidly
urbanizing, it remains a predominately rural country. The majority of Chinese
workers are not yet covered by any formal pension system. Among those who have
been and are now covered, there has been a steady rise in the number receiving
formal pensions during the past 25 years. Concurrently, there has been a sustained
decline in the ratio of covered workers to pensioners in China , a trend that
threatens the well-being of the Nation's formal old-age security system (Figure
13).
Following a decade of experimentation,
a new framework for old-age security emerged in the mid-1990s. The intent is
twofold: (1) To replace cradle-to-grave support provided by State-owned enterprises
with an expansion of coverage beyond the State sector and (2) to introduce pooled
funding, which deflects risk. The new system includes a defined benefit pension
providing a 20-percent replacement rate of the average wage and a defined contribution
individual account. Owing to the unfunded liabilities of the former system,
individual accounts have remained largely notional as today's workers pay for
today's pensioners.
Social security reforms
in China were brought about primarily because of the restructuring of State-owned
enterprises and changes associated with the movement toward a market economy.
However, new pressures have emerged in light of the rapid pace of population
aging. Researchers are calling for a higher retirement age to counter the falling
ratio of workers to pensioners. The Government is also considering converting
to a system with a fully funded component, which raises questions about funding
the transition to a new system. Another concern with this approach is where
to invest funds that will accumulate in individual accounts, given that China
's capital markets are relatively immature.
Source: China Ministry of
Labor and Social Security and China National Bureau of Statistics. China Labor
Statistics Yearbook. Beijing : China Statistics Press, various years; and China
National Bureau of Statistics. China Statistical Abstract. Beijing : China Statistics
Press, 2006.
Report : Why Population
Aging Matters: A Global Perspective
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