BIZweek n°224 19 jan 2019
BIZweek n°224 19 jan 2019
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  • Parution : n°224 de 19 jan 2019

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  • Editeur : Capital Publications Ltd

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SAMEDI 19 JANVIER 2019 BIZWEEK ÉDITION 224 ers, lack of savings could be a particularly acute problem for the poor. At the macro level, understanding the implications of demographic developments and pension system characteristics for future saving is critical, as national saving is an important source for financing domestic investment and absorbing country-specific shocks, with implications for growth and economic stability. The saving rate also determines how fast a country can rebuild buffers at a time of historically high global debt (IMF 2018b). Motives for personal saving and the design of pension systems could also directly influence individual saving behavior, thereby affecting the overall net foreign asset position of a country and the composition of investment portfolios (Staveley-O’Carrolland Staveley-O’Carroll 2017 ; Eugeni 2015). This has implications for the dynamics of international capital flows, external imbalances, and global interest rates. AGING SOCIETIES. The global population is undergoing a significant transition ; after a record increase in the 20th century, population growth is decelerating. Declining fertility rates, combined with increased life expectancy, will result in older populations in the coming decades (Figure 1). In many countries— especially Japan and some European countries—fertility rates are below those required to replace the population. At the same time, life expectancy at age 65 is projected to increase by around a year per decade. As a result, by 2050, on average, the old-age dependency ratio-the ratio of the elderly population (65 years and older) to the working age population (15–64 years)—will double. Today, Japan is the only country with an old-age dependency ratio over 40 ; by 2050 more than 55 countries will exceed that ratio. ASYNCHRONOUS DEMOGRAPHIC TRANSITIONS AND IMPLICATIONS. Countries are at different stages of the demographic transition. The pace and timing of the transition will have different implications across countries for labor supply and for private and public saving rates. Most advanced economies and some emerging market countries (for example, Russia and Ukraine) are in the late stage of demographic transition, with aging wellunderway and the working age population declining or about to decline. United Nations projections suggest that the working age population will fall by about 20 percent in Europe between 2015 and 2050 and by almost a quarter in Korea. In the United States, Australia, and New Zealand, however, the working age population will still be growing over this period. A lower share of workers in the population means that output per capita will falland national saving rates could potentially decline, owing to increased transfer payments to and lower private saving rates among the growing elderly cohort. Other emerging and some developing countries (for example, China and some countries in Latin America) are at an advanced stage of demographic transition, having already enjoyed the bonus of a demographic dividend—a period during which the working age population expands relative to the POST SCRIPTUM young and the old. More workers make it easier to take care of a relatively smaller pool of elderly people through intergenerational transfers (pensions or intrafamily transfers) and contributes to higher saving rates in some countries. This bonus has now ended in many countries in this group and will end very soon for the rest. In countries at an early stage of demographic transition (for example, India, Mexico, Indonesia, and countries in the Middle East and North Africa), fertility rates are declining but remain relatively high, with the share of working age population expected to peak in coming decades. Countries in the pretransition demographic phase (mainly countries in sub-Saharan Africa) have yet to experience the benefits of a demographic dividend (IMF 2015a) and are not the focus of this note. ARCHITECTURE OF PENSION SYS- TEMS AND AGING. Differences in pension system arrangements and their funding have important implications for how aging could affect saving. Most countries rely on defined benefit (DB) pension schemes, under which benefits depend on the number of years of contributions and the individual’s earning history, typically complemented by a means-tested basic pension. Some countries have defined contribution pension systems based on individual accounts, which often coexist with the DB scheme. Pension systems also differ in the extent to which liabilities are prefunded. Most DB schemes are financed on a PAYG basis, in which general revenues or specific contributions from current workers and employers fund the benefits of current retirees. In contrast, pension benefits in most DC schemes depend on the value of accumulated assets over the individual’s working life. This difference in funding structure implies that aging (by increasing the ratio of elderly beneficiaries to younger workers who fund benefits) is likely to have a direct impact on public saving in PAYG schemes and (through the life-cycle theory of saving) on private saving in DC systems. PUBLIC PENSION SYSTEM PARA- METERS AND PRIVATE SAVING. The parameters of public pension systems can influence workers’consumption-versus-saving decisions. The impact on private saving depends largely on pension system generosity, which encompasses both the size of benefits per person (the benefit ratio) and the coverage (the percentage of elderly people who receive a pension). With a more generous pension system, retirees will have to rely less on private saving. As a corollary, low benefit ratios or low coverage can induce higher private saving, as people save on their own to avoid a large drop in their living standard at retirement. There is significant crosscountry heterogeneity along these two dimensions. In Europe, for instance, Greece and Cyprus provide pension benefits that are about 65 percent of the average economy-wide wages. The corresponding number is less than 30 percent in Latvia and Ireland. Advanced economies provide some type of public pension benefits to nearly all of their elderly citizens. In most emerging and developing economies, however, only a third to twothirds of the elderly are covered, because pension systems were designed to cover salaried workers or those in urban areas, leaving those who are self-employed or in the informal economy outside the system. AGING AND FISCAL SUPPORT FOR PENSION SYSTEMS. Pressures on public saving may arise even in funded systems, because increases in longevity or lower than expected investment returns could cause funding to fall short of providing adequate pension benefits at retirement. Governments might have to makeup part of the future shortfall, draining public resources. Fiscal support ratios that relate taxpayers to public pension system beneficiaries are also estimated to rise between 2010 and 2050 in many advanced economies. For European countries, tax revenues would have to be between 14 percent and 28 percent higher than they are today (or expenditures commensurately lower, or some combination of the two) just to offset the increased costs of aging populations (Lee and Mason 2017). For Japan and the United States, the corresponding numbers are 26 percent and 11 percent, respectively. TRADE-OFFS ASSOCIATED WITH RECENT PENSION SYSTEM REFORMS. To deal with the costs of aging, many countries have enacted significant pension reforms in recent years. Reforms aim largely at containing the growth in the number of pensioners, typically by changing the key parameters of the pension system ; for example, increasing the retirement age, tightening eligibility rules, or reducing the size of pensions by adjusting benefit formulas. Many of these parametric reforms have improved the long-termsustainability of DB/PAYG pension systems. However, additional reforms may be needed ; for example, rationalizing generous grandfathering arrangements in earlier reforms (Italy, Portugal) ; reducing benefit ratios (Argentina, Brazil) ; and curtailing early retirement benefits (Russia). In many countries, reforms have been designed to protect current pensioners, shifting most of the adjustment burden to future generations of retirees (Chen and others 2017). In some countries, changes in the indexation of pension benefits are likely to erode real pension benefits over time, potentially contributing to old-age poverty (Hernandez de Cos, Jimeno, and Ramos 2017). In the 1990s a number of countries introduced DC systems that were funded by redirecting contributions from existing public PAYG systems. This transition put pressure on public saving, as it worsened the finances of the public scheme. In addition, lack of advance funding, low coverage, and low contribution rates continue to plague many DB and DC systems, with attendant implications for pension adequacy down the road. Because pension savings tend to be concentrated in high-income households for both types of pension systems, rapid aging could also exacerbate income inequality in the future. Prepared by David Amaglobeli, Hua Chai, Era Dabla-Norris, Kamil Dybczak, Mauricio Soto, and Alexander F. Tieman 6 Contd on page 7
SAMEDI 19 JANVIER 2019 BIZWEEK ÉDITION 224 POST SCRIPTUM CONCLUSIONS AND POLICY OPTIONS Aging challenge and saving. Aging populations will have important consequences for the evolution of saving rates across countries. Under current policies, public pension outlays in advanced and emerging market economies will increase by an average of 1 to 2½ percentage points of GDP, respectively, by 2050, depressing public saving. The impact on private and aggregate saving depends on the interaction of asynchronous demographic transitions and the design of retirement systems ; that is, funding, coverage, benefits promised to the elderly, and when they would start receiving those transfers. Thus, the appropriate responses to the aging challenge will vary across countries and will have to account for country-specific policy and institutional settings, including how pensions are determined and financed. For instance, in countries with relatively high saving rates and inadequate social security systems, increasing generosity may be warranted. In rapidly aging countries with relatively low saving rates and rising pension liabilities, the challenge will be to increase saving ratios in a sustainable way. For today’s younger generations in many countries, saving more for the future will become increasingly important to ensure retirement income security. Public pension system reforms. Overly generous pension benefits (owing to high benefit ratios or a low statutory retirement age) can interact with projected demographic trends to lower aggregate saving. Reducing public pension generosity (for example, curtailing early retirement benefits or reducing benefit ratios) could attenuate long-termfiscal vulnerabilities and moderate the fall in aggregate saving. To counter these trends, today’s workers will need to prepare for the future by saving more and extending their work lives. In advanced economies where pensions have been largely reformed, for those born between 1990 and 2009, simulations suggest that increasing the retirement age by five years (from today’s average of 63 to 68 in 2050) would close half the projected gap in benefit ratios relative to today’s retirees. If members of the same cohort were to put aside an additional 6 percent of their earnings each year, they would close the other half of the gap in the benefit ratio. Financial sector and labor market policies could support such behavioral changes. Balancing sustainability and equity considerations. The distributional consequences of pension system reformcan be significant. While ongoing and planned reforms will improve pension system sustainability, average benefit ratios are projected to decline sharply in many countries. Thus, additional pension system reforms would need to be carefully calibrated to avoid undercutting the welfare of future retirees and fueling poverty among the elderly. One option would be to link additional increases in retirement age to longevity gains, with adequate provisions for the poor, whose life expectancy tends to be shorter than average. To minimize unintended negative consequences of such programs on aggregate saving (either through excessive fiscal costs or indirectly by crowding out private saving), antipoverty programs should be carefully designed and targeted. Improving pension system adequacy to reduce precautionary saving. In China, for instance, the transition to a market-based economy that began in the 1980s resulted in a weakening of the social safety net, reducing pension spending and social transfers to very low levels. Lower income households now have a saving rate of 20–30 percent, compared with minus 20 percent in many peer countries (IMF 2017). Similarly, in Korea, the public pension system covers only about a third of the elderly, and replacement rates are low by international comparison, resulting in a saving rate of nearly 30 percent. These countries have room for fiscal maneuver ; they could redirect resources to reduce old-age poverty by expanding coverage of the social security systems, raising social pensions, and enhancing targeted social transfers. These actions would reduce households’need for precautionary saving while ameliorating inequality and old-age poverty. Boosting private saving by improving pension system architecture. The presence of a DC scheme can support higher private saving rates, attenuating the negative effect of aging on national saving. Countries with an enabling environment might consider complementing the public pension scheme with a funded DC scheme.32 However, such reforms are not a panacea to deal with the aging challenge ; for example, too few people may be covered or contribute to the system, or contributions over the working life of an individual may fall short of providing adequate pension benefits at retirement— many private pension funds are underfunded.33 In addition, future returns on savings (interest and investment rates) in an aging world could be lower, leading to lower-than-expected returns on the accumulated assets in such systems. In this case, governments might still have to makeup for at least part of the gap. Country experiences also suggest that pension system transitions from PAYG to funded schemes can generate large and persistent fiscal costs (to fulfill the promises made to people who had contributed to the old systems) that reduce national saving. Development of financial sector instruments to encourage voluntary saving. The ability of households to diversify retirement-related risks will depend on the availability of age-specific financial products (for example, annuities and long-termcare insurance). Countries with underdeveloped financial sectors would benefit from boosting financial inclusion (for example, efforts to reduce the costs of bank account for individuals) and creating sound and resilient banking sectors that offer the right mix of long-termsaving instruments. Financial literacy could foster a culture of saving and help people better plan for retirement. And government policies could focus on increasing voluntary private saving ; for example, by providing tax-preferred saving vehicles related to pensions, such as the 401(K) plans in the United States. Taxpreferred general or education saving accounts could also be considered, but participation of middle-income households would be essential for these schemes to generate additional saving rather than displacing existing saving elsewhere (OECD 2007). Nudges to encouraging workers to save can also help ; for example, by automatically enrolling them in pension schemes, as in the United Kingdom. Counteracting the effect of aging on labor supply. On current demographic trends, many countries will face a declining labor force, which will drive down saving. Policies should focus on reforms that close gender gaps in labor force participation (as was done in Italy and Spain) and encourage people to lengthen their productive work lives, given their increased longevity. Policy actions could include ensuring equal remuneration for equal work and providing childcare services. Governments can make it easier for older people to remain in the workforce by reconsidering taxes and benefits that favor early retirement. Migration could also play a role in boosting the labor force in many advanced economies, but this is a politically contentious issue. In many emerging market economies, it is important to decrease the large share of young people who are neither participating in the labor market nor studying. Furthermore, reducing the large share of the labor force that does not work in the formal sector— and thus does not pay taxes or contribute to social security— could boost saving. Education and training policies could use some modifications to better align skills with rapid technological change, which will replace labor in some sectors but may be labor-augmenting in others (Manyika and others, 2017). Private (and to some extent public) saving will play a key role in helping individuals cope with these trends and changes. 7

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