Abstract
In section 1 the essential background details have been provided in terms of the pension reform debate and of the advantages and disadvantages of the different pension reform strategies. Given the difficulty of reaching operational conclusions regarding the choice of pension system to adopt and given the conflicting signals coming from any broad based literature review, it is clear that the final choice in terms of the actual pension reforms to be implemented rests to a large extent on the empirical supporting evidence. Using a new ageing model which has been constructed for this analysis, sections 3 to 5 will summarise the results of a number of simulations which systematically address the key questions underlying the pension reform debate. This present section has an introductory role in that it will present the main properties of the model to be used in the subsequent sections for evaluating the various parametric and systemic reform options.
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It should be noted that the EPC expenditure to GDP ratio projections not only cover old-age pensions but also other replacement income to people aged 55 and over, i.e. early retirement pensions, disability and survivors pensions and other transfers to the elderly. Entitlement to this additional replacement income is not determined on the same basis as for old-age pensions. Moreover, it should be mentioned that most, though not all, of these government expenditures are financed on a PAYG basis. A proportion of these expenditures in some Member States may be financed on a funded basis and/or through transfers from the general government (i.e. not directly from social security contributions).
This result is almost identical to that reported in Mc Morrow and Röger (1999) based on Eurostat’s 1996 population projections for the period 2000–50. This similarity in terms of the GDP loss associated with ageing is not that surprising however given that, while individual EU country population projections have in some cases changed quite significantly between the 1996 and 2000 Eurostat exercises, the population projections for the EU-15 as a whole have remained very similar, in terms of both the overall population total and its decomposition into the various age cohorts.
The magnitude of this change should be stressed, with every 1% point increase in social security contributions being equivalent to between €40–45 billion in any given year.
The consumption to GDP ratio rises in the central scenario due to the higher marginal propensity to consume (MPC) of retirees, with the share of retirees in the overall population rising steadily throughout the period.
Assessment of the economic and budgetary impact of the labour market and pension generosity assumptions underpinning the recent pension expenditure projections to 2050 of the EU’s Economic Policy Committee (EPC).
It should be noted that while the EPC definition of the benefit ratio (average pension/GDP per worker) can over particular periods of time deviate markedly from the more commonly-used replacement rate definition (average pension/average wage), nevertheless the evolution should be broadly similar over a period of 50 years if one assumes, as is the case with the ageing model, that real wages and productivity grow in line with each other over the long run.
Using Eurostat’s latest demographic forecasts, there is a sharp upward movement in the old age dependency ratio over the period 2000–2050. On the basis of the national models used for the EPC’s analysis, this rise in the dependency ratio is forecast to increase pension expenditure by nearly 6 1/2 percentage points over the next 50 years. Using a slightly different definition of the old age dependency ratio (i.e. the working age population is defined more realistically as 20–60 rather than the 15–64 age cohort used for the EPC’s analysis) but one which nevertheless produces a similar absolute change in the ratio over the period 2000–2050 to that used by the EPC, the ageing model forecasts an increase in pension expenditure of 7 percentage points over the same period. These increases are expected to be reduced significantly on the assumption that the EPC’s labour market changes and pension generosity reductions are introduced, with the national models used by the EPC predicting that the pension expenditure increase will be roughly halved to an increase of about 3 percentage points and with ECFIN’s ageing model suggesting an increase of 3 3/4 percentage points compared with the dependency ratio-induced increase of 7 percentage points if none of the EPC changes are introduced.
This measure of distributional fairness tries to take both perspectives into account — namely in terms of avoiding further increases in the burden of taxation on workers and in terms of avoiding large losses in living standards for pensioners.
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© 2004 Springer-Verlag Berlin Heidelberg
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Mc Morrow, K., Roeger, W. (2004). Description of Model Used to Assess the Pension Reform Options. In: Welfens, P.J.J. (eds) The Economic and Financial Market Consequences of Global Ageing. European and Transatlantic Studies. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-24821-7_7
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DOI: https://doi.org/10.1007/978-3-540-24821-7_7
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