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Recent years have seen a wave of pension reforms across OECD countries. These changes were motivated primarily by concerns about the financial sustainability of pension systems in the context of ageing populations. An in-depth look at pension systems reveals complex structures and rules, which make it difficult to compare retirement-income regimes. Nevertheless, sharing experience of pension reform and its impact provides valuable information for policy makers...
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There have been numerous typologies of retirement-income systems. The terminology used in these categorisations has become very confusing. Perhaps the most commonlyused typology is the World Bank’s “three-pillar” classification (World Bank, 1994), between “a publicly managed system with mandatory participation and the limited goal of reducing poverty among the old [first pillar]; a privately managed mandatory savings system [second pillar]; and voluntary savings [third pillar]”. But this is a prescriptive rather than a descriptive typology. Subsequent analysts have allocated all public pension programmes to the first pillar. This has included earnings-related public schemes, which certainly do not meet the original definition of the first pillar. The most recent addition is the concept of a “zero pillar”, comprising non-contributory schemes aimed at alleviating poverty among older people. But this is rather closer to the original description of a first pillar...
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The main features of OECD member countries’ pension systems are summarised in Table 2.1. This follows the typology of the previous chapter (Table 1.1), dividing the pension system into two tiers. The summary necessarily leaves out much of the institutional details. More complete descriptions are provided in the country studies...
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This report adopts a “microeconomic” approach to comparing retirement-income systems, looking at prospective individual entitlements under all 30 of OECD member countries’ pension regimes. These microeconomic techniques were first developed for the retirement-income reviews of nine OECD countries (OECD, 2001)...
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The relative pension level is the individual pension divided by economy-wide average earnings, rather than by individual earnings as in the replacement-rate results in the previous chapter. Figure 5.1 shows relative pension levels in OECD member countries on the vertical axis and individual pre-retirement earnings on the horizontal. Countries have been grouped by the degree to which pension benefits are related (or not) to individual pre-retirement earnings...
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The replacement rates and relative pension levels discussed above give a first indication of the magnitude of the pension promise, but they are not comprehensive measures. For a full picture, it is necessary to take account of life expectancy, retirement ages and the indexation of pension benefits. These determine for how long the pension benefit must be paid and how its value evolves over time. To compare countries’ different provisions, the pension entitlement at retirement is converted into a value of pension “wealth” using standard actuarial techniques. For each country, the present value of future pension payments is calculated, using a uniform discount rate of 2% and country-specific life expectancy. Since the comparisons refer to prospective pension entitlements, the calculations use national life expectancies as projected for the year 2040...
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Building on the results for replacement rates and pension levels across the range of individual earnings, it is possible to develop indicators to address further policy questions in pensions. How much will today’s pension promises cost in the future? How much of that cost will be met by the public and private sectors? Answers to these questions require composite indicators of pension systems that aggregate the results for workers at different earnings levels that were presented in Chapters 4 to 6...
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Six OECD member countries have defined-contribution (DC) pensions. Pension entitlements in DC schemes depend crucially on the rate of return earned by the contributions when they are invested. The baseline assumption of the modelling is that the real return earned by DC pensions is 3.5% per year. This is a relatively conservative assumption by historical, empirical standards. Between 1984 and 1996, real rates of return of pension funds in eight OECD countries averaged 8% per year (OECD, 1998, Table V.3)...
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The charts in Figure 5.1 of Chapter 5 show how the pattern of pension entitlements varies with earnings for different countries. This illustrates the very different philosophies of different pension systems, particularly in their relative emphasis on the insurance and redistributive roles of pension systems. The allocation of countries to six groups (Figures 5.1A to 5.1F) depends on the strength of the link between pre-retirement earnings and post-retirement pension entitlements. It is based on a single summary indicator, the calculation methodology and results of which are presented here...
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The country studies follow a standard schema. First, there is a detailed description of the rules and parameters of the pension schemes:
- �Qualifying conditions: pension eligibility (or �gretirement�h) age and years of contributions required to receive a pension.
- �Benefit calculation: the rules for each schemes making up the pension system, such as earnings-related schemes, mandatory private plans and resource-tested schemes.
- �Treatment of pensioners under the personal income tax and social security contributions, including any reliefs for pension income.
- �Economic variables: the earnings of the average production worker in local currency and, using the market and the purchasing-power-parity exchange rates shown, converted into US dollars.
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The two-tier pension system consists of a basic state pension, which is pension-incometested, and a range of statutory earnings-related schemes, with very similar rules for different groups. The schemes for private-sector employees are partially pre-funded while the public-sector schemes are pay-as-you-go financed (with buffer funds to even out future increases in pension contributions)...
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The new system combines an earnings-related public pension with mandatory, funded, defined-contribution schemes. This applies to new labour-market entrants and people aged 42 or under at the time of reform. Older workers could choose between this mixed system or a pure pay-as-you-go, public pension. The modelling assumes that workers are covered by the mixed system...
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The public pension is a basic scheme paying a flat rate to all who meet the contribution conditions. There is also a means-tested pension to provide a safety net for the low-income elderly. Voluntary occupational pension schemes have broad coverage: around half of employees. (The government has a target to increase this proportion to 70%.)...
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The new Italian pension system is based on notional accounts. This is a variant of a traditional pay-as-you-go, public pension system. Contributions earn a rate of return related to GDP growth. Benefits are a function of accumulated notional capital and an actuarial factor (which takes account of average life expectancy at retirement). It applies in full to labour-market entrants from 1996 onwards...
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The Dutch pension system has two main tiers, consisting of a flat-rate public scheme and earnings-related occupational plans. Although there is no statutory obligation for employers to offer a pension scheme to their employees, industrial-relations agreements mean that 91% of employees are covered. These schemes are therefore best thought of as quasi-mandatory...
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The new pension system applies to people born in 1949 or after, that is aged 50 at the time of the reform. The new public scheme is based on a system of notional accounts. People under 30 (born in 1969 and after) at the time of the reform must also participate in the funded scheme; people aged 30-50 (born between 1949 and 1968) could choose the funded option. However, the choice had to be made in 1999 and it was irrevocable...
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The new pension system, introduced in 1999, applies to people aged 45 or under at the time of reform. The old and the new systems will cover older workers proportionally: people born 1938-53 will receive pensions under a mix of the old and new rules. The earnings-related part is based on notional accounts. There is a small mandatory contribution to individual, defined-contribution pensions and an income-tested top-up. Occupational pension plans – with defined-benefit and defined-contribution elements – have broad coverage...
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Britain has a complex pension system, which mixes defined-benefit and definedcontribution formulae and public and private provision. The public scheme has two tiers (a flat-rate basic pension and an earnings-related additional pension), which are complemented by a large voluntary private pension sector. Most employee contributors “contract out” of the state second tier into private pensions of different sorts. A new income-related benefit (pension credit) has recently been introduced to target extra spending on the poorest pensioners...
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Occupational pension schemes, voluntarily provided by employers, are common in many OECD countries. This section shows detailed results on the value of these pension entitlements for four countries: Canada, Denmark, the United Kingdom and the United States. These four countries were chosen for three reasons. First, coverage of occupational pensions is broad: around one third of employees in Canada, a little under half in the United Kingdom and the United States and around 80% in Denmark.1 Secondly, occupational pensions play an important role in providing retirement incomes. Thirdly, data are available on the rules and parameters of different employers’ plans for these countries...
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Over 40% of the Canadian workforce are members of occupational pension schemes, known as retirement pension plans. Around 45% of this total are members of public sector schemes. This gives a coverage rate in the private sector of around 30% compared with nearly 100% coverage among public-sector employees...
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Defined-contribution schemes are agreed between the social partners. Coverage is almost universal. Contributions to these schemes are typically between 9% and 17% of earnings. Benefits are usually withdrawn as an annuity, although some schemes allow for lump-sum payments. Annuity calculations are based on an assumed interest rate, which is 1.5% for recent contributions and schemes (although was previously 4.5%). However, the schemes operate on a “with-profit” or “participating” basis. This means that pension increases depend on the investment performance of the fund and the mortality experience of its beneficiaries. Since 2000, all negotiated schemes must use unisex life tables for calculating pension values...
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Defined-benefit occupational pension schemes provide a pension usually related to years of membership of the scheme and some measure of final salary when covered by the plan. Most public-sector schemes pay 1/80th of earnings per year of membership, plus 3/80ths as a lump sum. So the benefit after a full, 40-year career would be half of final salary as an annuity plus 1½ times final salary as a lump sum. Private-sector schemes are more diverse. Around 60% pay 1/60th of final salary. But taking a lump sum (known as commutation) reduces the annuity value. Around a fifth of plans are more generous than this, while around 7% pay less than 1/60ths or 1/80ths plus a lump sum...
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The majority of occupational pension schemes in the United States are final-salary defined-benefit schemes. These cover 56% of occupational pension members, with 23% in flat-rate defined-benefit plans (which pay a fixed amount for each month of coverage), 11% in average-salary schemes and 6% in defined-contribution plans...