## tnmea2022004 ## Source details **Canonical URL:** [tnmea2022004](https://www.imf.org/-/media/files/publications/tnm/2022/english/tnmea2022004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tnm/2022/english/tnmea2022004.pdf.md) - [Structured JSON version](/-/media/files/publications/tnm/2022/english/tnmea2022004.pdf.json) --- ### Executive summary — role, purpose, and core messages - Public pension spending: important for both fiscal and welfare perspectives; often one of the largest single public expenditure items, especially in advanced and emerging market economies, representing a double-digit share of GDP. - Paper purpose: - Guidance to IMF staff on when and how to engage on pension issues in surveillance and program work. - Tools to help staff: understand pension system characteristics; access channels of macro-criticality; integrate pension analysis into surveillance and program activities. - Macro-criticality arises via three channels: - Fiscal sustainability (FS) - Spending adequacy (SA) - Spending efficiency (SE) - Key operational principles: - Adopt long-term and comprehensive perspective; reforms usually take time to affect spending. - Prefer gradual and transparent reforms where feasible to allow individual adjustment. - Avoid policy responses to short-term shocks that undermine long-term pension objectives; pension systems are typically poor instruments for addressing short-term economic problems. - Tailor policy design to country-specific social and economic objectives and political economy realities. ### Macro-criticality channels — diagnostics and implications - Fiscal sustainability (FS) - FS issues arise in mature systems facing aging or in systems expanding coverage. - Even relatively small and gradual parameter changes can materially impact public finances in the long term. - A system may be unsustainable if honoring entitlements requires reducing other public spending, increasing taxes, or assuming growing debt. - “Relevant horizon” should ensure that at least two subsequent generations’ working years are included. - Spending adequacy (SA) - SA issues show when spending is insufficient to meet objectives: avoiding old-age poverty and lifecycle consumption smoothing. - Many emerging market economies and developing countries face large coverage gaps that may undermine adequacy. - Spending efficiency (SE) - SE issues arise when design/generosity generate unnecessary negative macroeconomic, behavioral, or distributional impacts (employment, savings, informality). - Examples: high labor taxes causing work disincentives; lax early retirement/disability rules reducing older-worker participation. - Trade-offs - Containing spending pressures while maintaining adequacy may require re-thinking benefit design and compressing benefit distributions. - Broadening coverage to improve adequacy may require limited benefits initially (poverty alleviation focus) and a clear financing strategy. - Equity enhancements (closer relation between earnings/work history and benefits) can increase expenditures if adequacy for low earners is maintained. ### Assessment approach and policy responses - Assess FS, SA, SE jointly and identify trade-offs and country-specific sequencing. - Integrate pension analysis into surveillance and IMF-supported programs where macro-critical. - Use actuarial assessments and long-term projections; examine both stock indicators (ADL or open-group net liabilities) and expected net flows. - Financing options for increased pension spending: higher payroll taxes; greater general revenue financing; increased debt; lower spending on other public goods and services — each has constraints (political feasibility, impact on informality, debt space, opportunity cost). ### Design, timing, and reform principles - Reforms typically affect new entrants and accrue slowly; grandfathering and gradual implementation are common. - Consider interactions with tax compliance, health insurance coverage, labor force participation among older workers, and informality. - Avoid undermining system credibility by retroactive changes to accrued entitlements. - Communications strategy and political economy considerations are critical for reform durability. ### Operational support and scope - IMF engagement guided by assessment of macro-criticality in surveillance, program contexts, and capacity development. - Staff should seek technical input from Fiscal Affairs Department (FAD) and external experts as needed. ### Selected numeric signals and benchmarks preserved from source - A contribution history of 40 years will result in 40 points under a point system. - Pension spending commonly takes up 10 percent or more of GDP on average in advanced and emerging market economies. - Earnings-related universal schemes spending above 10 percent of GDP merit further scrutiny. - The term “relevant horizon” should ensure that at least two subsequent generations’ working years are included. - Target replacement rate in international practice and ILO standards: 40–60 percent range. - Accrual rates higher than 1.8 call for further scrutiny. ### Reference - *Executive Summary, Technical Notes and Manuals 22/04 | 2022* --- ### Introduction — IMF engagement, objectives, and structure - IMF engagement context: - Follows June 2019 Board approval of the Strategy for IMF Engagement on Social Spending. - This departmental paper operationalizes Board Paper recommendations for public pension spending; first in a series covering other social spending components. - Objectives for staff: 1. Identify channels through which public pension spending may become macro-critical. 2. Assess the importance of these channels. 3. Identify appropriate policy responses and trade-offs. - Paper structure overview: - Chapter 2: pension systems overview and terminology. - Chapter 3: three macro-criticality channels and evaluation approaches. - Chapter 4: incorporation into surveillance and program design. - Annexes: (1) reform options (parametric, structural, paradigmatic); (2) resources for staff (data sources, projections, literature). --- ### Gender aspects of pension provisions (Box 1) - Key observations: - Men and women differ in life expectancy, labor-market prospects, and use of parental benefits; pension outcomes reflect lifetime socioeconomic status. - Women often become eligible earlier than men by significantly (2–5 years) on average in many countries (source text wording preserved). - Women more frequently take up survivor pensions and often for longer durations. - Most contributory systems offer higher implicit returns to women’s contributions; regulators disallow gender-specific life tables in some mandatory schemes. - Redistribution note: - Redistribution is valid social objective but identify where redistribution is excessive (for example, very generous survivor benefit eligibility). - Behavioral evidence: - Funded reforms had limited effect, at best, on informality, compliance, and coverage. - Promises of higher pensions for lower contributions typically fail to result in higher compliance. --- ### Point systems and Notional Defined Contribution (NDC) schemes (Box 3) - Point systems - Contributors accrue points annually; a 40-year average earnings history yields 40 points. - Total points × average wage at retirement → starting pension. - Allows intragenerational horizontal equity; government sets cohort “cake size” via exchange rate translating points to money. - NDC schemes - Pay-as-you-go financing with individual notional accounts; returns are notional and based on expected long-term macro and demographic developments. - At retirement, notional balances converted to annuities similar to single-premium annuities. - Transparency links contributions and benefits strongly but can create political/fiscal constraints by making claims appear monetary and prompting unsustainable notional returns. - NDC also referred to as “nonfinancial defined contribution” in some literature. - Trade-offs and preconditions - All features have pros/cons; governments must consider public expectations and necessary preconditions. - Fiscal sustainability definition - Sustainable if, under current policies, known demographics, and conservative macro assumptions, the system will not run into prolonged or permanent financing constraints over a suitably long horizon (“relevant horizon” covering at least two subsequent generations’ working years). --- ### Definition and measurement of public pension spending (Box 4) - Measurement challenges: - Include all relevant spending: social security institutions, public occupational schemes, extra-budgetary funds, and items sometimes embedded in wage bills. - Ensure pension payments used as payment agents for other welfare programs are cleaned of non-pension items. - Contingent liabilities from explicit government guarantees (rate-of-return guarantees, minimum annuity guarantees, takeover of occupational schemes) must be estimated. - Funding and projections: - Full funding of pay-as-you-go schemes is often neither possible nor necessary; focus on commitment to long-term projections integrated into policymaking. - Adequacy benchmarks: - Adequacy depends on government objectives; ILO/International practice suggests target replacement rate in the 40–60 percent range. - Flat-rate pensions should not be lower than these benchmarks relative to earnings of a typical “ordinary (unskilled) adult male labourer” per convention standards. --- ### Benefit adequacy at the individual level and efficiency overview (Box 5 and related) - ILO Recommendation No 67 and Convention No 102 standards: - Contributory old-age pensions for 30 years affiliation: no less than 40 percent of previous earnings; later conventions 45 percent and 55 percent for low earners. - Empirical observation: - 40 percent of “low earnings” often insufficient to prevent poverty; in EU Member States 40 percent of low-earnings threshold is below common relative poverty lines. - Efficiency definition: - Public pension spending efficient if coverage and benefit levels meet objectives without undue welfare losses, labor/capital distortions, or tax avoidance. - Examples of design inefficiencies: - Coverage gaps; target benefit levels unsupported by contribution rates; generous special treatment for occupational groups; final-salary schemes causing perverse redistribution; early retirement without actuarial neutrality; high administrative costs (operating expenses can consume as high as 25 percent or more of revenues). - Implementation inefficiencies: - Missing citizen/taxpayer/death registries create “ghost beneficiaries.” - Administrative preconditions missing for funded reforms (prudential norms, market infrastructure). - Poor control over disability pension uptake; remedies include re-assessments, rehabilitation, anti-discrimination and flexible employment modes. --- ### Integrating pensions into country work — surveillance, programs, and communications (Annex 2 summary + Boxes 6–8) - Surveillance and timing - Assess material changes in pension systems during Article IV consultations; depth of engagement should match macro-criticality and available expertise. - Encourage authorities to prepare regular long-term pension projections and fiscal/distributional impact assessments. - Program engagement and conditionality (Box 6 & Box 7 examples) - Pension reforms may be included in IMF-supported programs when critical for program success; conditionality should be parsimonious and aligned with program objectives. - Quantitative targets rarely set directly on pension spending; pension elements can be part of social spending floors and fiscal targets subject to conditionality. - Structural benchmarks and prior actions can focus on actuarial assessments, fiscal cost estimates, regulatory frameworks, or operationalizing supervisory agencies. - Communication and ownership - Clear communication of why IMF engages on pensions, policy options, and fit with macro objectives is essential. - Work with IMF Communications Department and authorities for broader stakeholder engagement; ownership by authorities is crucial. - Selected case evidence and numbers preserved exactly as in source: - Japan 2012: fiscal deficit 10 percent of GDP in 2012; social security spending nearly 55 percent of total non-interest spending; old-age dependency ratio 38 percent in 2010 and expected 57 percent in 2050; government subsidy about 2 percent of GDP. - Nicaragua 2012: coverage 23 percent of the labor force; trust fund projected to be depleted by 2021; more than 75 percent of pensioners received the minimum pension; minimum contributory years proposed to increase to 30 years from 15 years. - Serbia 2013: public pensions about one-third of general government spending and 14 percent of GDP; contribution rates high with tax wedge of 38 percent; pension fund deficit 7 percent of GDP; proposed measures estimated to yield savings of 0 8–0 9 percent of GDP per year and cumulative savings of 31–35 percent of GDP by 2050. - Greece 2010: projected pension spending increase of 12½ percentage points of GDP over four decades. - Communication examples (Box 8): - Algeria (2019): long-term projections including present value of future deficits to compare with reported debt; estimated retirement ages, contribution rates, accrual rates for improved sustainability; subsidy estimates by income deciles. - Panama (2015): costed baseline and reform options over a 40-year period; estimated fiscal impact of delaying reforms; presented scenario analyses of operating/merging reserves; advised on portfolio allocation and administrative constraints. - Estonia (2019): workshop on private pension scheme performance and preconditions for funded arrangements. - Ukraine: long-term engagement on retirement-age increases, contribution rates, and indexation; highlights continuous engagement and cooperation with World Bank. --- ### Typical pension policy reforms and implementation considerations (Annex 1 summary) - Reform typology and general considerations: - Parametric adjustments: change eligibility, benefit rules, contribution levels while keeping system fundamentals. - Structural reforms: change mix of features (public vs private, financing mode, risk-sharing). - Paradigmatic shifts: change overall objectives (for example, move from earnings-related DB to flat, tax-financed poverty-focused pensions). - Parametric examples: - Retirement age increases (including actuarially neutral adjustments and automatic links to life expectancy); tighten early retirement options with actuarial neutrality; adjust vesting periods; reform survivor and disability pensions (survivor/disability can constitute up to 20 and 30 percent of total pension spending, respectively, per source text). - Accrual rate adjustments: many advanced economies reduced accrual rates; accrual rates higher than 1.8 call for further scrutiny. - Calculation base length: move toward full career to reduce final-salary favoritism. - Benefit indexation: prefer legally described, indicator-driven rules; trend toward price indexation from wage indexation for fiscal prudence. - Contribution rate adjustments: - Reducing payroll tax wedge can encourage labor demand but must be reconciled with pension promises to maintain sustainability. - Structural/paradigmatic measures: - Funded reforms require preconditions: comprehensive pension policy, healthy macroeconomic outlook, financial sector readiness, implementation capacity. - Reverse privatizations or merge fragmented schemes require comprehensive fiscal and welfare impact assessments and clear treatment of legacy entitlements. - Paradigm shifts (e.g., introducing universal non-contributory benefits) require assessment across FS, SA, and SE and gradual implementation consistent with fiscal and administrative capacity. - Funded reforms enabling conditions (Box A1): - Preconditions: clear pillar roles, broad social/political agreement, fiscal space for transition deficit, macro stability, liquid capital markets, regulatory framework, and implementation capacity. --- ### Analytical tools, data, and resources (Annex 2) - Internal resources (FAD and IMF) - FAD publishes long-term pension projections in Fiscal Monitor annexes; projections based on partner data (World Bank, OECD, ILO, EC) and are updated with new data. - FAD tool available for staff to identify impacts of reforms on baseline sustainability projections. - Analytical toolkits: - Pension Template: simple model for broad reform option examination; produces long-term fiscal and welfare (replacement rate) projections; user-friendly; results indicative; Template expected available May 2021 (source text preserved). - Expenditure Assessment Tool (EAT): Excel-based for international comparison. - Pensions Knowledge Exchange website: regulatory information and country indicators. - Internal papers and titles preserved exactly as listed in source. - External resources and data sources - Regulatory info: Social Security Programs Throughout the World; ILO/ISSA country profiles; European Commission Ageing Report Country Fiches; Pension Watch (HelpAge). - Data: UN Population Division; ILO Social Security Expenditure Database and World Social Protection Database; Eurostat ESSPROS; European Commission Ageing Report; World Bank Pensions Data and ASPIRE; OECD pensions datasets. - Selected external publications preserved exactly as listed in source. - Country-specific technical assistance reports: list of countries preserved exactly as in source. --- ### Practical guidance for staff (operational checklist distilled from the text) - Establish whether pension issues are macro-critical via FS, SA, SE channels. - If macro-critical: - Document pension system facts and proposed changes. - Quantify fiscal implications (short- and long-term) using long-term projections and actuarial assessments. - Link pension recommendations to macro-fiscal and program objectives; consider conditionality principles if included in programs. - Design communications and stakeholder engagement strategy in collaboration with authorities and IMF Communications Department. - Assess distributional impacts and propose mitigating measures (for example, social assistance targeting). - Leverage FAD, external partners (World Bank, ILO, OECD, EC), and available analytical tools. *tnmea2022004 — Technical Notes and Manuals 22/04 | 2022* ### Executive Summary 1 ### Executive Summary ### Role and importance of public pension spending - Public pension spending is important from both fiscal and welfare perspectives. - It is often one of the largest single public expenditure items, especially in advanced and emerging market economies, representing a double-digit share of GDP. - Pension benefits often serve as the most important source of income among the elderly (especially for lower-income groups) and are a key policy lever to mitigate poverty among the elderly and support planning for old age. - By pooling risks across a large segment of the population, pension schemes facilitate consumption smoothing across working and retirement years, income groups, and individuals with varying mortality, health status, and labor market characteristics. - Insurance against pension-related risks can have implications for macroeconomic variables such as labor supply and savings. ### Purpose and audience of the paper - Provides guidance to IMF staff on when and how to engage on pension issues in surveillance and program work. - Aims to ensure consistent and appropriate policy advice across diverse country contexts and to enhance engagement quality with authorities and development partners. - Focuses on tools to help staff: - understand important characteristics of a country’s pension system; - access the various channels of macro-criticality; and - integrate pension analysis into surveillance and program activities. - Recognizes variation in pension systems and country-specific contexts (level of development, fiscal space, labor market conditions) and provides information on where to obtain additional support. ### Macro-criticality of public pension spending: three channels - The macro-criticality of public pension spending can arise through one or any combination of three channels: - Fiscal sustainability (FS) - Spending adequacy (SA) - Spending efficiency (SE) - Fiscal sustainability (FS): - FS issues can arise in countries with high pension coverage and aging populations (advanced and some emerging market economies) or in countries expecting spending increases as they expand coverage (emerging market economies and developing countries). - Pension policy reforms can have significant short- and long-term fiscal implications; even relatively small and gradual changes can materially impact public finances in the long term. - Spending adequacy (SA): - SA issues arise when existing spending is insufficient to achieve stated social objectives related to poverty alleviation and consumption smoothing over the lifecycle. - Spending efficiency (SE): - SE issues can emerge when pension generosity and design generate unnecessarily large negative macroeconomic, behavioral, or distributional impacts, including adverse impacts on employment and savings outcomes. - Many policy assessments require consideration of more than one channel and the potential trade-offs among them. ### Assessment approach and policy responses - The paper discusses how to assess the importance of FS, SA, and SE channels, appropriate policy responses, and possible policy trade-offs. - Emphasizes integrating pension analysis into surveillance and IMF-supported programs where macro-critical. - Highlights the need for consistent, context-sensitive policy advice reflecting country objectives and political economy realities. ### Design, timing, and reform principles - Emphasizes a long-term and comprehensive perspective when evaluating public pension spending and advising on policy. - Notes that most pension reforms take time to impact pension spending; where feasible, reforms should be gradual and transparent to allow individuals time to adjust work and savings decisions. - Warns against unintended undesirable impacts of pension design and reform on areas such as tax compliance, health insurance coverage, labor force participation among older workers, and labor market informality. - In the context of economic shocks (for example, COVID-19), cautions against responses that undermine pension systems’ ability to meet long-term social objectives and underscores that pension systems are typically poor instruments for addressing short-term economic problems. - Stresses that pension policy design and reforms need to reflect country-specific social and economic objectives and political economy realities. ### Operational support and scope - The IMF’s engagement is guided by an assessment of macro-criticality in surveillance, program contexts, and capacity development. - The paper provides tools and information to staff on understanding pension policy issues and where to obtain further support. *Executive Summary, Technical Notes and Manuals 22/04 | 2022* ### INTRODUCTION ### INTRODUCTION ### IMF engagement and purpose - In June 2019, the IMF Board approved the Strategy for IMF Engagement on Social Spending and supported the systematic incorporation of social spending issues into the IMF’s analytical, surveillance, and program-related work. - This departmental paper operationalizes the Board Paper’s recommendations for public pension spending and is the first in a series addressing other social spending components (social safety nets, health, education). - Public pension spending is of interest to the IMF from both fiscal and welfare perspectives: - Pension spending is often one of the largest single public expenditure items, especially in advanced and emerging market economies, representing a double-digit share of GDP. - Pension policy reforms can have significant short- and long-term fiscal implications, including adjustments to scheme parameters in mature systems or expansion of coverage. - Pension benefits are often the most important source of income among the elderly (especially for lower-income groups) and a key policy lever to mitigate old-age poverty and support retirement planning. ### Macro-criticality: three interrelated channels - The IMF assesses social spending through the lens of macro-criticality arising via one or a combination of: - Fiscal Sustainability - Capacity to finance spending needs without undermining macroeconomic stability (increasing fiscal deficits and debt, crowding out other expenditures). - Concerns can reflect large projected spending increases due to aging in mature systems or plans to expand coverage or introduce generous systems in emerging market and developing countries. - Spending Adequacy - Adequacy of spending, at the aggregate level, to meet pension policy objectives: avoiding old-age poverty and facilitating lifecycle income smoothing. - Many emerging market economies and developing countries face large coverage gaps that may undermine adequacy. - Plans to improve adequacy should be accompanied by financing strategies, including social security contributions and general revenues. - Spending Efficiency - Design and implementation features that ensure policy objectives are achieved without unnecessarily large negative macroeconomic, behavioral, or distributional impacts. - Examples: large spending concentrated on small subgroups; high labor taxes causing work disincentives; lax entitlement rules (early retirement, disability) reducing labor force participation among older workers. ### Trade-offs and policy design considerations - Addressing one aspect of macro-criticality can affect the others and requires careful trade-off analysis: - Containing spending pressures while maintaining adequacy may require re-thinking benefit design and compressing benefit distributions. - Broadening coverage to improve adequacy may, at least in the short term, require limiting benefits to poverty alleviation rather than lifecycle consumption smoothing. - Equity enhancements (for example, closer relation between earnings/work history and benefits) can increase expenditures if adequacy for low earners is to be maintained. - Even marginal policy choices can involve significant short- and long-term trade-offs. - Countries need a broad, long-term perspective because pension systems aggregate career decisions and savings over multi-decade horizons: - Reforms should recognize limited adjustment time for those later in careers, favor gradual and transparent reforms, and where possible avoid large short-term spending adjustments. - Pension designs influence and are influenced by tax compliance, health insurance coverage, labor force participation among older workers, and labor market informality. ### Crisis responses and COVID-19 - The COVID-19 pandemic reinforced the importance of strong pension systems and highlighted risks of policy responses that undermine long-term social objectives. - Shocks can aggravate underlying macroeconomic, labor market, and fiscal tensions and accelerate threats to sustainability, adequacy, or efficiency. - Pension systems are typically poor instruments for addressing short-term economic problems; responses to temporary shocks need to be time-limited to avoid undesirable long-term trajectories. ### Objective and intended use of this paper - The paper aims to improve staff understanding of: 1. The different channels through which public pension spending may become macro-critical. 2. How to assess the importance of these channels. 3. The types of policy responses that are appropriate and the trade-offs involved. - The paper supports consistent, context-sensitive IMF policy advice across surveillance, program, and capacity development work and provides tools for staff to engage with authorities and development partners. - Staff are encouraged to seek detailed technical input from the IMF Fiscal Affairs Department and external experts where required. ### Structure of the paper (overview) - Chapter 2: Overview of typical pension systems, variation in policy objectives and design, and common terminology. - Chapter 3: Discussion of the three macro-criticality channels (fiscal sustainability, spending adequacy, spending efficiency) and evaluation approaches for different country contexts. - Chapter 4: How macro-criticality considerations should enter surveillance and program design, incorporating long-term pension issues into medium-term fiscal frameworks, designing quantitative targets and structural benchmarks, and communicating analytical results to authorities. - Annexes 1 and 2: (1) Common reform options (parametric, structural, paradigmatic) with caveats and trade-offs; (2) Resources for IMF staff (data sources, regulatory repositories, projections, selected literature). ### Pension systems: objectives and features - Overarching objective: provide income replacement after exit from the labor force and efficiently redistribute longevity, disability, and loss-of-breadwinner risks over an efficiently sized pool of participants. - Two basic policy goals achieved by pension systems: - Poverty alleviation. - Consumption smoothing. - Efficient functioning requires risk pooling (distinguishing pensions from pure savings plans) and economies of scale via expanded coverage. - Pension benefits are lifelong payments to eligible beneficiaries and may be augmented by one-off or periodic supplements; lump-sum payouts may not meet pension policy objectives. - Risks typically covered by regular pension payments include: - Old-age pensions: triggered by legally defined retirement age; related to reduced earnings capacity and longevity risk; determined by affiliation length and reference earnings. - Disability pensions: triggered by reduced earnings capacity due to medical conditions; depend on age, affiliation, and degree of disability. - Survivor pensions: cover immediate dependents; benefit rules depend on deceased’s beneficiary status, entitlement, and number/age of survivors. ### Typology, special features, and fiscal implications - Pension entitlements are among the longest legal or contractual financial obligations, often exceeding 60 years. - Pension entitlements begin at first employment and expire with death of the last eligible survivor, covering multi-decade horizons and various economic cycles. - Legal and constitutional protections can make pension entitlements difficult to amend retroactively and mean forward-looking adjustments have long-term effects. - Public pension spending, especially in advanced and emerging market economies with universal and mature systems, often is the single largest public expenditure item; even small fluctuations can materially affect public finances (for example, central or general government deficits). - Large pension expenditures constrain tax policy and revenue administration and influence fiscal room for other public goods and services. - Policy choices are constrained by legacy entitlements and long-term expectations influencing labor supply, saving, and consumption; pensions already in payment or accrued near retirement are politically difficult to adjust and reforms typically produce gradual, incremental impacts taking several years to materialize. - Governments need a long-term perspective and consider interactions with gender aspects and other policy areas (healthcare, education, nondiscriminatory labor market regulations and practices). ### Illustrative historical note on entitlement horizons - Example cited: The law on U.S. Civil War veterans’ pension was enacted on July 14,1862. The last pensioner whose benefit derived from this law died in 2020, aged 90—demonstrating that pension systems must be designed with a rather long horizon in mind. *Source: tnmea2022004 - INTRODUCTION* ### BOX 1 Gender Aspects of Pension Provisions ### BOX 1 Gender Aspects of Pension Provisions ### Gender differences and implications for pensions - Men and women have different life expectancies, and their biological differences make them sensitive to different short-term, long-term, and permanent health issues. - In many countries, women’s access to healthcare and education still lags behind that of men and their labor-market prospects remain poorer in terms of hiring, promotions, and wage levels. - The design and actual use of parental benefits (income replacement programs and paid or unpaid parental benefits) are typically heavily skewed toward mothers, which can further affect earning opportunities over their lifetimes. - Pension benefits sum up and mirror the socioeconomic status of participants from birth to retirement. ### Design features that address gender disparities - Most contributory pension systems offer higher implicit returns to women’s pension contributions than for men to ensure equal opportunities and treatment. - Life expectancy differentials create differences in eligibility and take-up: - Although many countries have initiated the equalizing of retirement ages for men and women, on average women still become eligible for old-age pensions significantly (2–5 years) earlier than men. - Survivor pensions (both as a main benefit and as a supplement) are taken up by women more often and for longer than for men. - Women often enjoy higher accrual rates than men, at least for segments of the accrual schedule, to ensure that their lower wage levels are less than fully reflected in their lower pensions. - In privately underwritten defined benefit products, regulators aim to achieve similar redistributive objectives by disallowing the use of gender-specific life expectancy tables in mandatory—and, in some cases, supplementary—schemes. ### Redistribution, potential excesses, and convergence effects - While redistribution across the insured population is typically seen as a valid social objective of public pension schemes, it is important to identify where such redistribution is excessive (for example, as with very generous survivor benefit eligibility conditions in certain regions), including as gender employment and earnings opportunities converge. ### Interaction of pension reform with broader policies and behavioral responses - Future improvements in sustainability, adequacy, and efficiency hinge on the interaction of pension regulations with factors and policies exogenous to the pension system: decades of labor, income, education, health, tax, and other policies. - Pension benefits—population coverage, benefit level, distribution of benefits, fiscal cost, and welfare impact—reflect how pension rules translate decades of economic policy, history, and individual choices into eligibility and payments. - Pension reforms appear to have only marginal impact on labor market variables, informality, compliance, and pension coverage: - Funded reforms (partially replacing defined benefit, pay-as-you-go schemes with privately managed, fully funded, defined contribution arrangements) had limited effect, at best, on informality, compliance, and pension coverage. - Promises of higher pensions—or the same pensions in return for lower contributions—to current workers typically fail to result in higher compliance. *Source: BOX 1 Gender Aspects of Pension Provisions, tnmea2022004* ### BOX 3 Point Systems and Notional Defined Contribution Schemes ### BOX 3 Point Systems and Notional Defined Contribution Schemes ### Point systems - Definition and mechanics: - An arrangement in which pension contributions (or the income base on which they are levied) are assigned a relative value, depending on how the individual’s contribution performance (or wage) compares to either the economywide average contribution (or wage) or that of the scheme’s affiliated members. - Pay-as-you-go financed and defined benefit. - Technically, contributors accrue points every year, the value of which can range between zero and the ratio of the maximum insurable and the average insured income. - A contribution history of 40 years will result in 40 points if the person was earning at the average every year, or if his/her total lifetime earnings were equal to the sum of average wages in the same period, or if he/she earned twice the average for 20 years—point systems attribute no value to the timing of cash flows. - At retirement, total points are multiplied by the average wage of the given year to arrive at a starting pension. - Advantages and policy features: - Can ensure intragenerational horizontal equity while permitting some room of maneuver for governments regarding intergenerational equity—the same relative contribution performance will result in the same relative portion of the cake, but the government can determine how big the cake is for each cohort. - The “exchange” rate at which accrued points are translated into money (the first pension after retirement) can be recalibrated for new cohorts as required by changes in longevity, regulatory changes, or fiscal necessities. ### Notional Defined Contribution (NDC) schemes - Definition and mechanics: - Register contributions paid, and returns to contributions, to individual accounts. - NDC schemes are pay-as-you-go financed; contribution revenues are used for paying current pensions, so account balances are “notional” (there are no securitized financial assets behind the balances). - Returns credited to individual pension accounts are notional—based on expected long-term macroeconomic and demographic developments instead of observed changes in asset prices and yields realized. - At retirement, notional account balances are translated into annuity flows in a manner similar to buying a single premium annuity from a private insurance company (except that NDC schemes avoid the high cost of commercially purchased annuity products and, being social security schemes, offering a larger risk pool). - Transparency and behavioral effects: - NDC schemes are very transparent and provide a strong link between contributions and benefits—recording contributions, notional balances, and returns in actual monetary terms make NDC accounts appear very similar, in the eyes of scheme members, to ordinary defined contribution pension accounts or retail investment products. - This transparency presents additional challenges: 1. The easy comparison of NDC account “performance” to that of ordinary savings or investment products may harm compliance or nudge governments toward crediting notional returns that are unsustainable. 2. Recognizing all claims in monetary terms makes it difficult for governments to adjust pension entitlements to macroeconomic realities. - Given pension entitlements’ extremely long maturity, there is more than a negligible likelihood that future fiscal challenges may require governments to adjust past pension entitlements, which can undermine the advantages of such systems. - Terminology note: - NDC is also referred to as “nonfinancial defined contribution” in some literature. ### Trade-offs, preconditions, and policy guidance - General observation: - All characteristics of point systems and NDC schemes have pros and cons; any choice or combination necessarily implies recognizing difficult trade-offs and externalities. - Preconditions and implementation considerations: - When governments consider introducing or changing pension systems, it is crucial to consider existing circumstances (including public expectations), necessary preconditions, and the likely consequences of these policy choices. - Designing and implementing pension policy should remain the prerogative of national governments; international organizations and other stakeholders can assist governments in setting objectives realistically and bringing about the necessary preconditions to support national policy choices. ### Context within pension systems and macro-criticality - Multi-scheme systems and coverage: - Most pension systems consist of more than one scheme; participation may be mandatory or voluntary and different risks may be separated into distinct branches or pooled together. - Systems combining different characteristics may require workers to participate in more than one scheme to realize complementary objectives—often referred to as “multi-pillar systems.” - Coverage (whether some groups are explicitly excluded) is unrelated to whether the system is unitary or fragmented. - Redistribution and adequacy: - Defined benefit schemes lend themselves more easily to internal redistribution and can accommodate both poverty alleviation and consumption smoothing. - The stricter the relationship between contributions and benefits (a characteristic of defined contribution schemes), the more likely governments will need a separate redistributive scheme for old-age poverty alleviation. - A strictly earnings-related pension scheme pays benefits commensurate with contributions (the system’s internal rate of return is the same for everyone, irrespective of earnings); low earnings during the reference period can result in benefits below socially acceptable minima. - Fiscal sustainability and assessment horizons: - A public pension system (or scheme) may be defined as sustainable if, under current policies, known demographic developments, and conservative macroeconomic assumptions, it will not run into prolonged or permanent financing constraints over a suitably long horizon. - “Current policies” include pension policy, other expenditure and revenue (including tax) policies, and such deficit and debt ceilings as may be applicable. - The “relevant horizon” should ensure that at least two subsequent generations’ working years are included. - Pension spending is unsustainable if, under current rules, continuously honoring pension entitlements requires reducing other public spending, increasing taxes or assuming growing debt. - Indicators and analytical priorities: - Analysis should examine spending levels and pressures; long-term pension spending pressures depend on the nature of the pension system, coverage and generosity, and demographic developments. - Actuarial assessments and long-term projections are crucially important. In addition to stock indicators (such as ADL or open-group net liabilities), expected net flows (surpluses and deficits) should be scrutinized over the same horizon as stock indicators. - What matters is the dynamics of unfunded liabilities—whether they are growing or declining—since many public schemes are assumed to be “going concerns” rather than liquidated. - Fiscal trade-offs for increased pension spending: - Four possible sources of financing: higher payroll taxes, greater general revenue financing (other tax and non-tax revenue), increased debt, and lower spending on other public goods and services. - Each financing option presents difficulties: high debt reduces room for new debt; already high payroll taxes make further increases politically difficult and may encourage informality and non-compliance; reallocating general taxation may be limited where maintaining a contribution-benefit link is desired; lower spending elsewhere can compromise growth potential and, especially in middle- and low-income countries, jeopardize investment in physical and human capital. ### Selected quantitative signals and benchmarks from the broader pension-system discussion - Example numeric benchmarks and observations preserved from source: - A contribution history of 40 years will result in 40 points under a point system. - Pension spending commonly takes up 10 percent or more of GDP on average in advanced and emerging market economies. - Earnings-related universal schemes spending above 10 percent of GDP merit further scrutiny. - The term “relevant horizon” should ensure that at least two subsequent generations’ working years are included. *Source: BOX 3 Point Systems and Notional Defined Contribution Schemes (tnmea2022004).* ### BOX 4 Definition of Public Pension Spending ### BOX 4 Definition of Public Pension Spending ### Measurement and reporting issues - Assessing and comparing pension spending is fraught with measurement and reporting issues. - To ensure completeness of public financial reporting and the analyses of the pension system—including intertemporal and cross-country comparability—it is necessary to include in “pensions” all relevant spending items. ### Typical reporting issues to consider when compiling pension spending figures - Social security institutions, as well as public occupational schemes, are usually not part of central government and function as extra-budgetary funds or other reporting entities only covered by general government reports. In the absence of general government financial reporting, it is important to obtain financial reports from these extra-budgetary and extra-governmental pension entities. - Pension benefit payments—especially for public occupational schemes—may not be reported in an institutionally segregated manner but may be included in the wage bill. This practice is more common for military/police schemes than for civilians. It is important, therefore, to include these spending items in total pension spending. - Social security schemes do not prepare balance sheets: social security “balance sheets” are cashflow statements that only record revenues realized and expenditures executed in a given fiscal year. Annual financial results reveal little about the system’s long-term financial health, especially in case of newly introduced schemes where contributions far outweigh benefit spending. - Public pension entities are often used as payment agents for other welfare spending programs due to their administrative capacity, individual records, and network of offices. It is important to ensure that spending on benefits is cleaned of any non-pension items. - Pension spending items are occasionally re-classified under a different name and/or moved off a pension agency’s financial statement into a central government agency or another extra-budgetary fund such as a health insurance scheme. Such reclassifications are known to have happened regarding minimum pensions (that is, the part of an earnings-related pension equal to some minimum) and “unearned pensions” (that is, when a job or status warrants a pension in excess of what the person’s contributions and the standard pension rules would imply—such as judges, prosecutors, miners, sportsmen, national heroes, etc.). Checking whether any such re-classification has occurred should be standard practice. - Contingent liabilities generated by explicit government guarantees issued to privately underwritten pension obligations also need to be estimated. Common cases include rate of return guarantees, minimum annuity guarantees, and taking over entire occupational (company) pension schemes if their failure to meet regulatory funding levels threatens servicing their benefit obligations. These guarantees may not be provisioned against, in which case the fiscal risks may directly translate into additional government spending. ### Funding and long-term projections - In most cases, replacing pay-as-you-go financing of public pension schemes with full funding is neither possible nor necessary. - The size of additional assets required for fully funding these schemes is beyond the means of most countries and it is questionable whether setting aside such reserves—which, most likely, would be invested in the domestic economy, used to finance public debt, or, to a lesser extent, invested abroad—would indeed make a positive impact on growth, equity, or efficiency. - What matters is a commitment to producing long-term projections and making them an integral part of social and economic policymaking. ### Adequacy of pension spending (aggregate perspective) - Spending adequacy refers to whether public pension spending is sufficient, at the aggregate level, to achieve a government’s social policy objectives. - While seeking universal pension coverage to address old-age poverty is an objective most countries would strive for, universal consumption smoothing requires significantly higher fiscal resources. - Aggregate spending can be deemed adequate even though coverage and benefit levels are inadequate for some individuals (for example, when countries spend significant amounts on earnings-related pensions while many individuals do not receive a benefit sufficient to achieve basic poverty alleviation objectives). - An assessment of the adequacy of public pension spending requires an integrated assessment of the different schemes within the system, including privately financed schemes. ### Determinants of coverage and eligibility - Labor market characteristics and fiscal space are key determinants of pension coverage and eligibility. - Low- and middle-income countries often struggle with high levels of informality, which manifests itself through low tax and contribution compliance. Typically, higher per capita GDP correlates with higher formality and compliance, resulting in higher coverage. - Economic growth has not always translated into higher coverage: in many low- and middle-income countries, growth has failed to increase coverage through contributory schemes; in some cases (for example, eastern Europe) economic growth has not stopped coverage from declining. - Causes include difficulties of revenue administration accommodating major shifts in market structure, predominant nonstandard forms of labor, and disincentives for compliance caused by the high overall cost of moving from the informal into the formal sector. - Coverage may be expanded by introducing non-contributory pension benefits with eligibility linked to individual characteristics such as age, residence, or access to other sources of income, but introducing and expanding these schemes may require significant improvements in tax capacity and may need to be weighed against competing development needs on limited fiscal space. - In contributory schemes, eligibility is determined by coverage and contribution compliance during pre-retirement years; thus high coverage results in high eligibility and future eligibility rates can be predicted from current coverage rates. - In noncontributory, basic pension schemes, eligibility is unrelated to compliance during working years and thus high eligibility is relatively easier and quicker to achieve from a regulatory perspective. ### Adequacy benchmarks and trade-offs - What constitutes an adequate benefit level depends on government policy objectives; as a minimum standard public pensions should, in combination with other transfers, address old-age poverty. - For contributory earnings-related schemes the objective is to ensure relative benefit adequacy (prevent a major decline in consumption compared to economically active years). - International practice and International Labour Organization (ILO) standards suggest a target replacement rate in the 40–60 percent range. - From the poverty alleviation perspective, absolute adequacy requires a benefit set at a level that avoids at least extreme poverty. - It is important that benefit levels are not so high as to undermine incentives to contribute to earnings-related public pension systems (or to set aside precautionary private savings where feasible). *Source: BOX 4 Definition of Public Pension Spending, tnmea2022004* ### BOX 5 Benefit Adequacy at the Individual Level ### BOX 5 Benefit Adequacy at the Individual Level ### International standards and objectives on benefit adequacy - The International Labour Organization Income Security Recommendation No 67 sets general guiding principles regarding coverage, benefit adequacy, and financing for achieving income security for all. - Recommendation No 67: general objective of income security schemes is to “relieve want and prevent destitution by restoring, up to a reasonable level, income which is lost by reason of inability to work (including old age) or to obtain remunerative work or by reason of the death of a breadwinner.” - Recommendation No 67 states “income security should, if possible, be organized as far as possible on the basis of compulsory social insurance,” and recommends extending social insurance “to all workers and their families, including rural populations and the self-employed.” - On benefit levels: “Benefits should replace lost earnings, with due regard to family responsibilities, up to as high a level as is practicable without impairing the will to resume work where resumption is a possibility, and without levying charges on the productive groups so heavy that output and employment are checked.” - Social Security (Minimum Standards) Convention (No 102) expectation: earnings-related contributory old-age pensions for someone with at least 30 years of affiliation should be no less than 40 percent of their previous earnings. - Later conventions established higher standards of 45 percent, and 55 percent for low earners. - The Convention requires flat-rate pensions not be lower than the above benchmarks relative to the earnings of a typical “ordinary (unskilled) adult male labourer.” - Means-tested benefits to elderly persons: these benefits, together with other household resources, should be “sufficient to maintain the family of the beneficiary in health and decency.” ### Empirical observation on adequacy benchmarks - Empirical studies show that 40 percent of “low earnings” is insufficient to prevent poverty entirely in many countries. - Eurostat definition: low earnings = two-thirds of the median gross earnings of all employees (estimated by surveys of establishments employing 10 employees and more). - Relative poverty line defined as a certain proportion (40, 50, or 60 percent) of the median equivalized household income. - In all EU Member States, 40 percent of the low earnings threshold is below the relative poverty line commonly used in the European Union. ### C Efficiency of Pension Spending — overview - Public pension spending is efficient if coverage and benefit levels meet government policy objectives without causing undue welfare losses, labor or capital market distortions, or tax avoidance. - Spending inefficiencies arise from shortcomings in pension system design and implementation. - Typical design shortcomings stem from: - (1) disregarding structural conditions and administrative capacity constraints (examples: relying entirely on contributory arrangements in countries with high informality; introducing private, funded schemes as dominant scheme in economies with underdeveloped capital and financial markets; establishing basic universal pension schemes without adequately functioning citizen registries) - (2) using the pension system to address problems in other policy areas (examples: low labor force participation rates; frictional or structural unemployment; unavailability, poor design or inadequacy of other social spending programs; an oversized public sector). - Since its entry into force, the convention has been ratified by 59 countries.40 ### Selected examples of design inefficiencies - Coverage gap in absolute or relative terms: - Coverage = share of the working-age population participating in pension schemes. - Coverage gap measured either in absolute terms (against a universal target) or relative to a government’s own policy target. - Registration with scheme administrators does not necessarily imply regular contributions; importance of assessing whether registered members are accruing entitlements. - Footnote: The eligibility ratio measures the share of the elderly population eligible for a pension benefit.41 - Target benefit levels unsupported by contribution rates and regulatory parameters: - In defined benefit schemes, target replacement rate should be linked to contribution rate, life expectancy at retirement, sustainable implicit rate of return, and indexation mechanism. - Benefit levels insufficient to alleviate old-age income poverty: - Aggregate adequacy can mask group-level inadequacy (example: high pensions for former civil servants while large groups remain uncovered). - Special treatment of occupational groups: - Horizontal inefficiencies when some groups (armed forces, judges, prosecutors, government officials, miners, steelworkers, etc.) receive disproportionately generous pensions relative to contributions. - Historical rationales may no longer apply; job conditions have changed. - Exclusion of groups from mandatory social insurance: - Typical excluded groups: self-employed, farmers, artists, part-time employees, employees of small enterprises. - Exclusions can undermine future pension adequacy and create equity issues; part-time employee exclusions can disproportionately harm women. - Exempting certain income types from contribution base: - Non-pensionable items in civil service remuneration and contribution thresholds can weaken coverage expansion and produce unintended redistributive consequences.42 - Generous social pensions and minimum pensions diminishing compliance incentives: - Social pension design may weaken incentives to participate in contributory systems and to report earnings accurately, raising fiscal sustainability and equity concerns. - Final salary schemes: - Linking pensions to end-of-career income can cause perverse redistribution, incentives for late-career promotions, upward pressure on pension spending, and disincentives to labor mobility. - Outdated definition of disability and weak reintegration focus: - Disability usually second-largest pension expenditure after old-age pensions; problems arise when definitions are medical-only and ignore capacity to work and reintegration measures.43 - Expansive eligibility for survivor pensions: - Loose rules (extending to remote relatives, working-age survivors irrespective of prospects, or persons already receiving adequate pensions) increase spending and may affect labor supply. - Early and deferred retirement options lacking actuarial neutrality: - Early retirement options without actuarially neutral adjustments can undermine higher statutory retirement ages and increase beneficiaries. - Incompatible regulations hindering labor mobility: - Differing vesting, accrual, and liquidation rules across schemes create penalties for switching, particularly in DB arrangements. - Labor market impact of pension regulations: - Higher contribution rates raise total labor costs, may reduce labor demand or increase informality; incidence depends on employer/employee shares and bargaining position. - Minimum contributions can disproportionately affect low-wage workers by making effective payroll tax rates high and crowding out formal employment. - Taxation of pensions: - Pensions are deferred wages and should be taxed once: at contribution, accumulation, or payout phase. - Three theoretical tax regimes referenced: TEE, ETE, EET.45 - In progressive income tax regimes, the phase of taxation has important welfare consequences; reforms must avoid discontinuities between pre- and post-reform benefit levels.44 ### Selected examples of implementation inefficiencies - Disregard for administrative preconditions: - Eligibility verification hampered by incomplete or non-existent citizen, taxpayer, corporate, or residence registries; unreliable death registries lead to “ghost beneficiaries.” - Replacing public DB schemes with privately managed mandatory funded schemes requires fiscal rules, financial/capital market regulation, accounting and disclosure standards, and administrative preconditions. - Administrative capacity constraints and incompatibilities: - Enforcement constraints may lead to higher contributions or general revenue financing, producing unintended redistribution across income groups and cohorts. - Lack of information or means to apply for benefits undermines efficiency; harmonizing delivery and IT platforms can improve labor mobility. - High administrative costs: - Fixed costs and scale economies mean smaller or more complex schemes cost more; in some cases operating expenses can consume as high as 25 percent or more of revenues. - Poor control over disability pension uptake: - Issues: poor inflow control (screening fraud), gatekeeper incentives directing claimants away from rehabilitation/employment services, difficulty of labor market re-entry after long absences. - Remedies: re-assessments, well-designed training, anti-discrimination policies, flexible employment modes to reduce benefit uptake and support economic independence. ### Incorporating pensions issues into country work — General considerations - Country reports should: - (1) establish the macro-criticality of pension issues while considering the member country’s needs and the authorities’ policy priorities; - (2) if deemed macro-critical, clearly lay out the facts about the existing pension system and/or pension proposals; - (3) identify specific policy concerns arising from pension issues and link them to policy recommendations; - (4) account for macroeconomic and political economy implications of recommended policies and incorporate policy advice from IMF technical assistance, World Bank and other international organizations’ analytical work. - Transparency of fiscal reporting is crucial; fiscal sustainability analyses need to cover publicly underwritten pension schemes and ensure access to financial information including flows, assets and liabilities, and portfolio composition. - Attention required when public pension schemes operate outside central government and fiscal reporting does not encompass general government. ### How to discuss macro-criticality and analytical coverage - Pension issues can be macro-critical via fiscal sustainability, spending adequacy, and spending efficiency channels; an integrated assessment of all aspects is recommended. - In advanced economies, engagement often starts with fiscal sustainability but should also consider adequacy and efficiency. - In low-income countries, focus may start with adequacy and coverage expansion to address poverty concerns, along with the resources needed for fiscal sustainability. - Country teams should assess: - pension system characteristics (public/private, DB/DC, pillars, coverage, benefit levels); - role of the pension system within the broader social protection system; - country preferences and circumstances, and tradeoffs consistent with macroeconomic, balance of payments, fiscal and debt sustainability; - analytical gaps and the need to leverage in-house and external expertise and collaborate with international development institutions. *Source: BOX 5 Benefit Adequacy at the Individual Level, Technical Notes and Manuals 22/04 | 2022* ### Annex 2 on resources and collaboration). ### Annex 2 on resources and collaboration) ### Integrating long-term pension issues into a medium-term macroeconomic framework - Fiscal sustainability of pensions extends beyond the standard five-year projection horizon that anchors the IMF’s country macroeconomic frameworks. - Pension financial and welfare indicators change slowly; full impact of reform measures materializes long after implementation. - Use additional fiscal indicators, such as the “pension-adjusted” budget balance, to assess whether medium-term pension reforms would improve or worsen long-term fiscal or growth prospects. - Where possible, incorporate economic gains from pension system reforms (for example, through reduced social security contributions and labor market disincentives) into macroeconomic projections. - Link formal assessments or benchmarks to a narrative explaining why timely policy action is needed and the likely macroeconomic impacts to consider. - Balance of payment and exchange rate considerations are relevant especially in countries with large funded schemes investing heavily overseas; both accumulation and drawdown phases may impact the balance of payments and the exchange rate. ### When to discuss adequacy of pensions - Adequacy is macro-critical when: - insufficient social protection by pensions is an imminent issue; or - governments plan to significantly strengthen public pension systems (through coverage expansion and/or more generous benefits). - The UN Sustainable Development Goals can provide a starting point for adequacy analysis, especially SDG 1 (“End poverty in all its forms everywhere”) and SDG 8 (“Employment, decent work for all, and social protection”). ### Financing pension spending - If pension spending is inadequate relative to policy objectives or if expansion is proposed, staff should: - identify and quantify existing fiscal space; and - identify possible measures to create additional fiscal space to finance expansion and ensure fiscal sustainability. - Recommendations can draw on technical assistance and cover complementary reforms such as domestic resource mobilization, expenditure rationalization, or strengthening public financial management systems. - If streamlining is needed, staff should discuss how savings would be used (examples: strengthen other social protection elements, health, education, or fiscal and debt sustainability). - If pension spending is deemed adequate, assess risks of fiscal contingent liabilities if the system is inefficiently managed or underfunded. ### Efficiency considerations - Comparison with regional or development peers is often insufficient to establish inefficiency due to differences in design details, policy objectives, and administrative capacities. - Efficiency considerations remain important because savings from improved efficiency could: - contribute to medium-term fiscal consolidation; or - fund other priority spending items. - Possible specific measures: - improve methodology for identification of pensioners; - enhance pension funds’ management frameworks; - improve data collection for better analysis and monitoring. - Leverage IMF technical assistance and analyses by other institutions when identifying measures. ### Distributional effects of pension reforms - Staff should generally consider social and distributional impacts of pension systems and recommended reforms. - Reforms could increase the number of vulnerable and poor households; staff should identify mitigating policy measures (for example, strengthening social assistance). - Pension policies can have implications for inter-generational equity where high or increasing pension spending crowds out social protection spending for younger cohorts. - Pay attention to which households are considered poor and vulnerable, since classifications can be especially dynamic in times of economic turmoil. ### Calibrating the extent and pace of reform - Calibrate reforms to country-specific fiscal circumstances and policy objectives. - Fiscal sustainability is important in determining appropriate scope—whether containing or expanding spending. - Prefer gradual reforms spread across multiple years to: - avoid large short-term increases in government spending; and - allow households time to adjust earnings and savings behavior prior to retirement. - Frontloading pension adjustment may be necessary if fiscal imbalances place macroeconomic stability at risk or if financing constraints fiscal deficits. - When benefit cuts are considered, factor in measures to fulfill basic poverty objectives in reform design and fiscal impact assessment. - When expanding coverage, pace should be consistent with the country’s capacity to expand the contributions base or mobilize tax revenues over the short term without unduly crowding out other key public spending areas. - Political economy considerations: - implementation is often lengthy and requires buy-in from diverse stakeholders, including the public; - reforms requiring multiple steps or backloaded measures risk reversal if durable buy-in is not secured ex ante. ### Communications strategy on pensions - Clear communication of IMF policy concerns and recommendations is essential given the complex political economy surrounding pensions. - Staff should clearly communicate: - why they are engaging on pension issues (the channels through which public pension spending is macro-critical); - the main policy options and recommendations; and - how recommendations fit with overall macroeconomic and inclusive growth objectives. - Clarify if recommendations draw on analysis by other institutions, including the government. - Work closely with the IMF Communications Department to engage a broader set of organizations in dialogue, including legislators, public workers, trade unions, and civil society organizations. - Ownership of reforms by country authorities is crucial. ### Surveillance: timing and scope of engagement - Engagement on pension issues in surveillance should be timely and driven by an integrated assessment of macro-criticality (domestic, external, or global stability impacts). - In Article IV consultations, staff should routinely assess whether material changes to the pension system (for example, changes to benefits, formulas, or legislative reforms) raise policy concerns and warrant engagement. - Depth and breadth of engagement should balance macro-criticality, urgency, and internal resources available. - When staff have limited pensions expertise, leverage resources within and outside the IMF early on. - Long-term projections are critically important for identifying fiscal risks due to long maturity of obligations and slow trends underlying pension finances. - Encourage and, if necessary, assist country authorities to regularly prepare long-term pension projections and fiscal and distributional impact assessments of proposed reforms or regulatory changes. - Integrate these analyses into fiscal legislation (for instance, as annexes to annual budget laws), support sustainability reports, and use procedural fiscal rules (such as mandatory, long-term impact assessments as formal preconditions to initiating legislation) to create demand for such impact assessments. - Past IMF engagement in surveillance has increased markedly in recent decades, though depth and traction of IMF advice varied across country cases. *Technical Notes and Manuals 22/04 | 2022* ### BOX 6 Examples of How to Address Pension Issues in Surveillance ### BOX 6 Examples of How to Address Pension Issues in Surveillance ### Japan 2012 - Macro-criticality of pension issues - Rationalizing social security spending was key to securing fiscal sustainability. - Japan’s fiscal deficit stood at 10 percent of GDP in 2012. - Social security spending was nearly 55 percent of total non-interest spending by the general government. - Japan’s old-age dependency ratio was the highest in the world (38 percent in 2010) and was expected to increase further (57 percent in 2050). - Public pensions play an important role in helping reduce old-age poverty as the system has a redistributive feature supported by a government subsidy of about 2 percent of GDP. - Efficiency concerns included the eligibility of dependent spouses for pension benefits without making contributions, resulting in an effective cross-subsidization of married employees by single employees and creating disincentives to work because a spouse would qualify for the benefit only when their income was below a certain threshold. - Policy recommendations - Staff discussed three main reform directions and their trade-offs in terms of fiscal sustainability, impact on growth and intergenerational imbalances: - Increase the pension eligibility age to narrow the gap relative to life expectancy at retirement (a difference which is larger in Japan than in most other countries). In parallel, expand the social safety net to protect older workers. These reforms could also have a positive effect on growth through higher labor force participation and higher consumption due to higher lifetime earnings. - Lower the pension replacement ratio as already planned under the 2004 macro-indexing, aiming to keep aggregate pension spending broadly constant despite population aging. According to staff, further reductions in the replacement ratio would undermine the pension system’s ability to contain old-age poverty. Moreover, the fiscal savings would be offset by higher demand for social assistance. Instead of an across-the-board cut in the replacement ratio the team recommended a more targeted reduction by introducing a “clawback” from the most well-off retirees. - Collect pension contributions from dependent spouses to generate fiscal savings and to address efficiency concerns. The team estimated that the alternative of increasing the contribution rate would generate fiscal savings but could have a negative effect on growth through lowering labor supply and aggravate intergenerational imbalances. ### Nicaragua 2012 - Macro-criticality of pension issues - The Nicaraguan defined benefit pension system had gradually become fully pay-as-you-go financed and fiscally unsustainable given its parameters and demographic and macroeconomic trends. - It was projected to start recording deficits in 2015 and its trust fund to be depleted by 2021. This would have put the public debt on an unsustainable path in the longer term. - The low coverage of the pension system (23 percent of the labor force) raised concerns about adequacy and was linked with the high degree of informality in the economy. - Aiming to be progressive, the minimum pension was set not to be lower than the minimum wage, which in turn was relatively high compared to the average wage in the formal sector. - More than 75 percent of pensioners received the minimum pension, and the formula did not reflect contribution histories. This indicated possible spending inefficiencies, depending on how the quasi-flat benefit distribution compared to the government policy objectives, how the guaranteed minimum benefit impacted labor participation and formalization, and whether this benefit level was necessary to respect both the government’s anti-poverty objectives and fiscal constraints. - Policy recommendations - Staff advice focused on reforms essential for long-term fiscal sustainability and increased efficiency: - Adopting a benefit formula to achieve actuarial solvency while increasing progressivity, while being mindful of not discouraging participation of higher-income workers. - Gradually increasing the retirement age from 60 to 65. The team estimated this should not have substantial adverse effects on unemployment. - Increasing the minimum number of years of contribution to qualify for a full pension to 30 years (at 15 years, Nicaragua was one of the lowest among Latin American countries). Below that, the pension would be proportional to years of contribution. - Delinking the minimum pension from the minimum wage. - Take steps to reduce labor market informality, broadening the base of contributors to the social security system. In the meantime, adopt moderate contribution rate increases to avoid deterring new entrants. - Diversify the pension fund’s portfolio of investment by considering alternatives to government bonds. ### Serbia 2013 - Macro-criticality of pension issues - Serbia’s public pensions accounted for about one-third of general government spending and 14 percent of GDP, among the highest shares in Europe. - Contribution rates were high with the tax wedge of 38 percent seen as a significant obstacle to employment creation. - The high deficit of the pension fund of 7 percent of GDP crowded out more productive public spending. - Despite numerous reform efforts by the government, pension spending as a percent of GDP was steadily increasing and the fiscal sustainability of the public pension scheme was an important macroeconomic concern. - Public pensions had an important role in poverty alleviation and maintaining an adequate level of pension benefits was a priority. Public pensions were the only pension income of the elderly, as there were no mandatory private pensions and effectively no voluntary schemes. - Poverty among pensioners (13 percent) was lower than nationwide (18 percent). - Efficiency concerns included lower retirement age for women than for men despite the relative life expectancy differential being the reverse, disincentives for working longer as after a certain threshold additional tenure was not credited, and a significant weakening of social contribution collections over the past decades. - Policy recommendations - The focus of policy recommendations was on reducing overall public pension expenditure as a share of GDP. According to staff estimates, the following measures would yield savings of 0 8–0 9 percent of GDP per year and total cumulative savings of 31–35 percent of GDP by 2050: - Raising statutory retirement age by five years for women to equate with that of men within 10 years (2013–22) followed by raising the statutory retirement age to 67 (2023–26). - Raising the minimum early retirement age for both men and women from 58 to 60 (2024–27). - Introducing penalties for early retirement and revenue neutral incentives for working longer. In Serbia, the effective retirement age was very low due to extensive options for early retirement (three-quarters of men and half of women retired early). - Serbia also continued reforms of the pension system in the context of an IMF-supported program. ### IMF-Supported Programs (Engagement and Conditionality) - Objectives and design - Engagement on pension issues in the context of IMF-supported programs should aim to address the underlying pension-related macroeconomic problems. - Pension-related issues identified as macro-critical during surveillance (due to concerns about fiscal sustainability, spending efficiency, adequacy for poverty reduction, or consumption smoothing) can also be critical for achieving the goals of IMF-supported program or for monitoring the implementation of the program. - Pension reforms often extend beyond the span of a program; measures embedded in programs should explicitly contribute to achieving overall program objectives, and program documents should clearly explain the linkages. - Program design in relation to pension reforms should ideally draw on analysis and policy recommendations from Article IV Consultations. If not available, staff will need to develop such analysis or draw on expertise of other institutions. - Authorities’ ownership and institutional capacity - The primary responsibility for assessment and design of pension reforms lies with the authorities; success hinges on their ownership. - Staff should understand members’ domestic social and political objectives, economic priorities, and circumstances to ensure ownership and durability. - Consideration of a pension reform in a program needs to consider the overall reform agenda and the authorities’ institutional capacity to avoid reform fatigue. - Conditionality principles and instruments - Conditionality on pensions is warranted when pension reforms are deemed critical for program success. - Establishment of program conditionality is subject to the Guidelines on Conditionality; conditionality should be parsimonious. - Quantitative targets, such as performance criteria (PC) or an indicative target (IT), do not tend to be set on pension spending directly (neither as floors nor ceilings). However, pension spending, or relevant elements of pension spending, can be included in the social spending floor, and should be built into the envisaged fiscal path and the fiscal deficit target, which is subject to conditionality, and supported by policy commitments laid out in the Letter of Intent/ Memorandum of Economic and Financial Policies (MEFP). - The coverage of pension spending as part of social spending floors can vary to reflect country-specific policy priorities and data availability. It can be narrowly focused on selected macro-critical pension programs or broadly focused where protecting all budgetary costs associated with pensions is seen as crucial. Staff should document and explain the approach taken in the country documents. - Structural benchmarks can be set for key pension measures that are critical for achievement of program objectives (for example, conducting actuarial assessments of a new pension system or completing fiscal costs estimates of a pension reform). - Pension measures can be specified as prior actions when critical for successful implementation of the program. Measures not critical for program goals can be included as policy commitments under the Letter of Intent or MEFP with clear implementation timelines. - Structural benchmarks related to public financial management can ensure transparent policymaking; procedural and substantive fiscal rules may be implemented to ensure pension-related regulatory proposals are accompanied by long-term fiscal and welfare impact analyses and regular long-term financial projections concerning pension, health, and long-term care obligations are submitted to legislature. - Coordination and communications - Effective coordination with other multilateral institutions on pension issues is crucial. Pension reforms designed by other institutions can be included in the program if critical to program success and monitorable, but the IMF cannot delegate responsibility for designing and assessing compliance with conditionality. - Staff could leverage analysis and know-how of other organizations and, where reform measures are indispensable for securing a donor disbursement critical to program success, those measures should be clearly identified in the staff report. - Pension issues included in program design should be a core part of the communications strategy. Staff should clearly communicate how pension-related measures support overall program objectives, the role of IMF, and justify any pension-related conditionality. Joint communications with the authorities are preferable. - Outcomes and experience - Engagement on pension issues has been long-standing and widespread in the context of IMF-supported programs. The IMF’s advice seeks to accommodate country-specific preferences and social objectives without compromising macroeconomic and growth objectives. - These approaches have contributed to tangible outcomes, for example, containment of public pension spending in percent of GDP in Greece and Serbia, and timely implementation of pension-related structural benchmarks (Armenia, Tanzania), although in Greece, some reforms were subsequently reversed by court rulings. *Source: tnmea2022004 - BOX 6 Examples of How to Address Pension Issues in Surveillance* ### BOX 7 Examples of How to Address Pensions Issues in IMF-Supported ### BOX 7 Examples of How to Address Pensions Issues in IMF-Supported Programs ### Greece 2010 Stand-By Arrangement - Why pension reform? - Greece’s fiscal position had deteriorated significantly in the decade prior to 2010, largely due to an expansion of social spending, particularly on health and pensions. - The pension system was deemed unsustainable, with spending projected to increase by 12½ percentage points of GDP in four decades and would become insolvent if corrective measures were not taken. - Reform measures - Comprehensive multiyear adjustment program to lower the fiscal deficit and the debt ratio. - Strengthen the link between contributions and benefits, with uniform rules and benefits indexed to prices. - Introduce a means-tested social pension for all citizens above the normal retirement age as a safety net, with protections for minimum pensions. - Exempt those living on the minimum pensions from benefit reductions. - Government invited representatives of businesses and labor to sign a social pact for the duration of the program to explain and forge broader public consensus. - Analysis - Pension system had been analyzed in previous IMF Article IV Staff Reports and Selected Issues Papers (SIPs), identifying significant underfunding and long-term fiscal pressures from aging. - Staff consulted with European Commission/IMF/European Central Bank experts and used a report by the National Actuarial Authority to assess whether new system parameters could significantly strengthen long-term actuarial balance. - Conditionality - A prior action at program request in May 2010: reduce public sector wage bill and pension bonuses, except for minimum pensions. - Structural benchmark (SB) set for the National Actuarial Authority to produce a report assessing whether parameters of the new system significantly strengthened long-term actuarial balance. - SB modified to allow more time: first report for main social security funds by end-2010, another for supplementary funds early 2011. - Parliament’s adoption of the comprehensive pension reform established as a subsequent SB. ### Greece 2012 Extended Fund Facility - Why pension reform? - Despite progress under the 2010 program, the share of pensions in per capita GDP had been rising and remained high by European standards. - More time and effort were needed to reduce pension spending to a level Greece could finance internally and to improve the fiscal position while protecting the most vulnerable. - Reform measures - To help achieve the 2012 fiscal target, a cut in pension spending of about 2½ percent was included among other new spending measures. - Beyond that, a 1–2 percent of GDP pension spending reduction was needed to support the planned 5½ percent of GDP fiscal adjustment through 2014. - Conditionality - Upfront measures to reduce pension spending by about 0 2 percent of GDP were discussed in the MEFP, including reducing supplementary pensions with a progressive schedule by reducing main pensions that exceeded a certain threshold. - Measures to eliminate arrears and deficits in lump sum pension funds were also discussed in the MEFP. - Additional measures planned to reduce non-wage costs and foster employment by reducing social security contribution rates for employers, accompanied by fiscal measures to ensure a neutral budgetary impact. - Structural benchmark established for the government to adjust pensions (with protections for low-income pensioners) and the base for contribution collections. - Other commitments: eliminate seasonal bonuses for supplementary and main pensions, increase statutory retirement age to 67 and postpone retirement eligibility by two years in all other cases including early retirement, remove remaining ineligible pensioners from pension rolls. ### Armenia 2010 Extended Credit Facility/Extended Fund Facility - Why pension reform? - Strengthening and expanding Armenia’s pension system had an important poverty reduction aspect. - Prior preparatory work: August 2007 Draft Framework Law on Pension Reform. - Reform measures - In response to the global economic crisis, pension spending was increased; in 2010 pension spending was maintained at the same nominal level of 2009 with additional planned increases in 2011, accompanied by measures to improve targeted delivery and efficiency. - Authorities decided to introduce a new, mandatory funded pension system, to be operational by 2014. - Recognized reforms were complex, needed to be well managed, and pension reform costs must fit within the fiscal envelope. - Analysis - Combined 2006 IMF Article IV Consultation and program review discussed Draft Framework Law preparation with World Bank assistance and noted capacity needs in asset management and insurance. - 2006 SIP analyzed implications of increasing pension contribution rates. - Combined 2008 Article IV Consultation and PRGF program request presented analysis of fiscal costs associated with plans to raise average pensions; staff stressed keeping reform costs manageable and gradual implementation. - Conditionality - Structural benchmark (SB) set on completion of estimates of fiscal cost associated with planned pension reform at time of 4th review in 2012. - New benchmark at 5th review: two pension regulations to be submitted to Cabinet to establish (1) procedures for managing the guarantee fund for mandatory, funded contributions and (2) quantitative and currency restrictions on investing mandatory funded pension assets. - MEFP commitments included laying out regulatory framework for pension funds, establishing adequate prudential norms based on financial stability risk analysis and FSAP Update recommendations. - Authorities prepared separate decrees and created a special fund for public relations and increasing awareness on the pension reforms. ### Serbia 2015 Stand-By Arrangement - Why pension reform? - Curbing sizable pension spending was critical for durable fiscal adjustment. - Parametric pension reform introduced in July 2014 prior to IMF-supported program, following issues identified during 2013 Article IV Consultations. - Reform measures - Progressive cut in nominal pensions legislated from November 2014: 22 percent for pensions between 25,000 and 40,000 dinars and 25 percent for higher pensions, yielding an effective 5 percent of GDP reduction in the pension bill. - Agreement to modify pension indexation formula among Budget System Law amendments to freeze nominal pension increases until spending fell to sustainable levels estimated to be less than 11 percent of GDP. - Parametric changes in mid-2014: higher statutory retirement age for women, increased minimum retirement age, introduction of actuarial penalties for early retirement. - Analysis - Engagement drew on analytical work from the 2013 Article IV consultation. - Conditionality - Parametric pension reform occurred prior to program approval; no conditionality was needed. - Authorities committed to a nominal pension freeze in the MEFP as part of overall fiscal consolidation; no additional structural conditionality was deemed necessary. ### Tanzania 2010 Policy Support Instrument and 2014 Policy Support Instrument - Why pension reform? - 2009 Financial Sector Assessment Program recommended operationalizing the Social Security Regulatory Authority (SSRA). - Absence of effective regulation and supervision of social security funds—assets of 10 percent of GDP or one-quarter of the financial system—added risk to the financial system and public finances. - 2014 PSI aimed to further strengthen pension guidelines to limit contingent liabilities. - Reform measures - Operationalize the SSRA: appoint Board and Director General (SSRA nominally established June 2008). - Introduce investment guidelines for pension funds and implement comprehensive governing legislation. - Enhance data collection, monitoring, and reporting of pension fund financial activities. - Harmonize pension guidelines to limit contingent liabilities. - Conditionality - 2010 PSI introduced three structural benchmarks: (1) appoint Head of Social Security Regulatory Agency and issue investment guidelines for pension funds, (2) introduce data collection and reporting system for pension funds, and (3) issuance of investment guidelines for pension funds. - 2014 PSI introduced SB on approval of pension harmonization guidelines (calculate pension benefits along same rules irrespective of occupation). - Reforms supported by a multiyear World Bank program. ### Lesotho 2010 Extended Credit Facility - Why pension reform? - Program sought to support broad-based growth and poverty reduction per the National Development Framework. - Maintaining adequate old-age pension benefits during program implementation was critical to poverty reduction objective. - Reform measures - Program did not call for reform of existing pension system; sought to protect adequacy of pension benefits by including old-age pension benefit in the definition of the social spending floor. - Conditionality - Program had an IT defined as the floor on central government social expenditures, which included spending on old-age pensions primarily targeted at vulnerable households. ### Dialogue with Country Authorities (communication considerations) - Communication framing - Embed policy advice within the macro-fiscal context; engage from fiscal sustainability, spending adequacy, and spending efficiency perspectives. - Recognize trade-offs and that appropriate reforms reflect government preferences and constraints. - Presentation of advice - Help authorities develop their own communication strategies; quantify the cost of delay where possible. - Present technical arguments and messaging that governments can use with stakeholders and media. - Adequacy and efficiency - Analytical work and policy advice also address adequacy and equity; reviews need not always propose cuts but can emphasize protecting social spending while increasing effectiveness and efficiency. - Emphasize “spending better” to improve adequacy and create fiscal space for other priorities. - Fiscal translation - Explain projected increases in pension spending in terms of additional financing needs (contribution rates or incremental deficits) and translate adjustment needs into retirement ages and replacement rates. - Compare future pension financing needs with resource needs of other large publicly financed spending (e.g., public education or healthcare) to clarify opportunity costs. - Poverty and targeting - Nuance the poverty context; review poverty assessments and household surveys to establish income position of pensioners. - Differentiate between pensioners and the elderly; design reforms to protect pensioners at bottom of benefit distribution and communicate this design feature clearly. - Equity implications - Reforms that most directly affect equity: broadening coverage, extending benefit calculation base, altering accrual schedule. - Retirement age increases favor those with higher life expectancy and better labor-market prospects. - Discontinuing special occupational treatments makes system more horizontally equitable. - Introducing basic pensions, minimum top-ups, and anti-poverty elements strengthens vertical equity. - Limiting survivor pensions to spouses and direct descendants reduces redistribution dependent on factors outside policymakers' control. *From BOX 7: Examples of How to Address Pensions Issues in IMF-Supported Programs (Technical Notes and Manuals 22/04 | 2022).* ### BOX 8 Selected Examples of Communicating Policy Advice ### BOX 8 Selected Examples of Communicating Policy Advice ### Algeria (2019) - Pension system facing sustainability and efficiency issues. - Technical assistance report helped inform the general public about difficulties facing the two major pension schemes and design shortcomings underlying sustainability and efficiency problems. - To underline need for reform and help communicate diagnostic findings, the technical assistance report: - Presented long-term projections both for a baseline (no policy change scenario) and for the various reform options offered. The present value of future deficits was also estimated to make the financing gap comparable to reported debt figures. - Estimated the retirement ages, contribution rates, and accrual rates that would be consistent with improved financial sustainability. - Estimated, by income deciles, the subsidy implied by pension benefit and contribution rules, highlighting the redistribution from low-income and informal sector workers toward better-paid scheme members. - Benchmarked pension regulations against best practice and provided international comparisons relevant to Algeria’s level of economic development. ### Cyprus (2013) - Context: financial crisis with major fiscal spillovers; authorities had started reforms prior to IMF technical assistance. - Technical assistance report commended reform efforts and urged authorities, for equity and efficiency considerations, to: - Equalize retirement ages across schemes and revise rules governing early retirement and gratuity payments to civil servants. The report explained the labor market and public wage bill consequences of the proposed measures. - Expand the pension calculation base to full career earnings and discuss the equity implications of final salary vs full career calculation rules. - The report also presented the baseline and the expected fiscal impact of the proposed measures to clearly identify the magnitude of the fiscal challenges. ### Estonia (2019) - IMF supported the Bank of Estonia convene a technical assistance workshop to generate a broader debate on causes and consequences of poor performance of private pension schemes and to help put the new government’s reform proposals into a broader policy context. - Workshop offerings: - Presentations and panel discussions on underlying reasons for funded reforms and preconditions materially impacting net investment returns and transparent operations. - International experience with regulation and performance of private pension schemes, including critical factors of success. - Possible reform options that may help improving the Estonian funded schemes’ performance. - Presentations and comments focused on pros and cons of various measures and likely capital market, welfare and fiscal consequences of the original reform, its possible improvements, and the option of reversing the structural pension reform—helping reinforce the IMF’s advisory role. ### Ukraine (2010– ) - FAD has been intensely involved in pension policy dialogue for more than 10 years. - Area department and FAD established close working relations with the Pension Fund of Ukraine, the Ministry of Social Policy, the Ministry of Finance, the National Bank of Ukraine (as financial sector regulator), and with the World Bank. - Experience highlights importance of continuous and flexible engagement: - Retirement-age increases—an area where Ukraine lagged behind other European transition economies—have taken time to materialize despite clear evidence of importance for financial sustainability; instead, only weaker incentives (through higher service time criteria) could be introduced. - IMF raised concerns about government proposals for a substantial contribution rate reduction, which failed to result in improved compliance. - Gains from the introduction of systematic benefit indexation rules were offset by discretionary measures regarding the timing of annual pension increases. - Ukraine is cited as a strong example of World Bank–IMF cooperation with regular technical level consultation, coordination of messages, and clear understanding of institutional leadership across technical areas. ### Panama (2015) - Technical assistance focused on deteriorating financial sustainability driven by generous eligibility and benefit rules. - Report contents and analyses: - Costed both the baseline and reform options over a 40-year period. - Provided the estimated fiscal impact of delaying reforms. - Presented scenario analyses of operating the existing scheme separately or merging their reserves. - Suggested standard parametric reforms. - Mission also advised on portfolio allocation of reserves and administrative constraints in monitoring pension scheme finances. - Broader scope—including portfolio management issues—was appreciated by authorities and underscored importance of relying on team members’ expertise even if expanding a technical assistance report’s scope. - Report was used extensively by the government when communicating need for pension reforms. - Three years after the mission, authorities decided to start gradually implementing the reforms proposed by FAD, emphasizing need for area departments and capacity development activities to keep referencing earlier recommendations so authorities can reach back to earlier advice when a window of opportunity arises. *Technical Notes and Manuals 22/04 | 2022 — BOX 8 Selected Examples of Communicating Policy Advice* ### ANNEX 1 TYPICAL PENSION POLICY REFORMS ### ANNEX 1 TYPICAL PENSION POLICY REFORMS ### General Considerations - Pension reform design must account for accrued pension liabilities, financial sector development, debt sustainability, and expected demographic and labor market developments, and the trade-offs across sustainability, adequacy, and efficiency. - Common trade-offs: - Short-term fiscal adjustment needs vs. long-term objectives (expanding coverage, maintaining benefit adequacy) vs. maintaining system credibility among taxpayers and beneficiaries. - Pension systems do not lend themselves to short-term expenditure cuts because most reform impacts occur at the margin (new retirees or newly accrued entitlements), yet small parameter changes can yield sizable short-term fiscal savings. - Fiscal adjustments that lower pension expenditures may reduce expected returns to contributions or alter distributional features across income groups and coverage status. - Behavioral and macroeconomic interactions: - Expanding coverage and enhancing adequacy can dampen household propensity to save; low coverage and inadequate pensions can raise precautionary savings. - Pay-as-you-go defined benefit schemes (including universal social pensions) are more likely to negatively impact long-term savings rates; fully funded schemes may replace one form of savings with another, leaving aggregate savings unchanged. - Design features and financial sector conditions (comparative returns, perceived safety, access to savings before retirement, regulation quality, macroeconomic/monetary/exchange rate/political stability) influence the pension system’s impact on savings and growth. - Labor supply and working pensioners: - Pension parameters (early retirement rules, rules on remunerated work while drawing pensions) influence late-career labor supply. - Best practice: permit work while receiving pensions while requiring continuing pension contributions; allow pension deferment by pensioners; avoid blanket prohibitions; consider whether working pensioners should pay contributions, be allowed to defer benefits, and whether sectoral prohibitions are reasonable. - Implementation timing and sequencing: - Pension reforms take a long time—often, decades—to make fiscal and welfare impacts felt; assess sustainability, adequacy, and efficiency over long horizons and introduce reforms early. - Front-loaded measures may build commitment and reduce reversals, but cohorts need time to adjust; understand differences between legislation, effectiveness, and implementation dates—focus on when regulations are actually applied. - Announcement effects matter (for example, tightening early retirement rules may trigger immediate inflows of early retirees). - Legal and equity constraints: - Contributory pension entitlements are often considered “earned rights” with legal protection, making retroactive revaluation legally challenging. - Beneficiaries near retirement have limited time to adjust labor supply, consumption, and savings—grandfathering of pension rights is common. - Most reform measures affect new retirees first and take a long time (often beyond two decades) to fully impact pension spending. ### Policy Options (categorization) - Parametric adjustments: - Leave overall objectives and basic features intact (DB or DC characteristics, level of funding, mode of financing) while adjusting parameters regulating eligibility, benefit rules, and contribution levels. - General rule: where fiscally feasible, adjust fundamental system parameters gradually to allow individual adaptation and avoid undermining past resource allocation decisions. - Structural reforms: - Change the mix of fundamental features (public vs. private management; mode of financing; risk-sharing between DB and DC; role of the state as regulator/provider/underwriter) while keeping overall objectives (coverage, targeted benefit levels). - Examples: partial replacement of public DB schemes with privately managed funded DC schemes, point systems, NDCs. - Paradigm shifts: - Change overall objectives of pension systems, including the role of the state. - Examples: replace earnings-related contributory DB schemes with general revenue financed flat pensions focused on poverty alleviation; add a dedicated poverty alleviation scheme (“zero pillar”). - Implication note: - Fiscal sustainability, spending adequacy, and spending efficiency impacts depend on the precise mix of reforms across these dimensions. ### Examples of Common Parametric Adjustments - Tightening eligibility criteria: - Retirement age increases: - Delay benefit receipt, reduce overall generosity when isolated from other changes, improve fiscal sustainability without reducing pension benefits in retirement. - Actuarially neutral increases (longer contributions and shorter benefit periods leading to commensurately higher benefits) can enhance efficiency and old-age protection. - If not actuarially neutral, lowering contributions can incentivize labor supply by reducing the tax wedge. - Effectiveness depends on translation into longer employment; complementary employment policies and strong social safety nets are important. - Automatic retirement age increases (linking standard ages to life expectancy or other indicators) can support fiscal sustainability and remove frequent legislative revisiting; examples of countries introducing automatisms include Cyprus, Denmark, Estonia, France, Greece, Italy, Portugal, United Kingdom, though they have yet to be triggered. - Tightening early retirement options: - Implement actuarially neutral benefit reductions for early retirees and limit maximum years of early retirement. - Periodically review occupational early retirement lists; employers should absorb full costs for hazardous jobs via higher contributions and provide retraining systems for second careers (important for armed forces, police). - Condition early retirement on long service or allow recognition for time spent raising children where appropriate. - Tightening early retirement is important to prevent unwarranted increases in early retirements when statutory ages rise, including disability-based exits. - Complementary policies for retirement age increases: - Anticipate possible unintended outcomes: higher unemployment, increased disability or social assistance uptake, higher poverty among those with poorer labor prospects. - Because retirement-age increases are easier for the better-off to accommodate, consider measures to strengthen labor market prospects of lower socioeconomic groups or provide income support in later working years. - Minimum vesting periods and minimum pensions: - Minimum contributory periods (“vesting periods”) determine eligibility for pensions; while intended to encourage employer loyalty, they can be inequitable and discourage contributions depending on labor market conditions. - Scope to tighten eligibility for minimum pensions within contributory schemes without curtailing earned pension rights—limit eligibility for top-ups to minimum pensions. - Survivor and disability pensions: - Survivor and disability pensions can make up to 20 and 30 percent of total pension spending, respectively. - Best practice: limit survivor pensions to immediate dependents and periods when surviving beneficiaries cannot adjust labor supply; pay permanent survivor benefits mainly to spouses close to retirement and to orphans until labor market entry; provide temporary survivor benefits where needed. - Control disability pension uptake at entry: assess lost vs. retained work capacities, include remaining employability, ensure quality control over medical assessments, and promote labor regulations for re-training and employment of people with disabilities. - Changing benefit level and distribution: - Accrual rate adjustments: - Accrual rate is the percentage of the pension calculation base added to existing pension entitlements per additional period (typically years) of contributions; the accrual schedule can be linear, convex, or concave. - Adjustments affect replacement rates; many advanced economies have reduced accrual rates to slow pension expenditure growth. - As a rule of thumb, accrual rates higher than 1.8 call for further scrutiny; lower accrual rates may still be problematic with high life expectancy at retirement and low contribution rates. - Concave accrual schedules better address poverty for people with short contribution histories; convex schedules incentivize longer contributory careers. - Calculation base length: - Expanding calculation bases toward full career reduces favoritism of final salary schemes (which reward steep near-retirement earnings profiles typical of civil servants and professionals) and improves fiscal sustainability and progressivity. - Benefit indexation: - Key parametric option to contain spending pressures depending on wage and price dynamics. - Two priorities: a legally described, regular, indicator-driven indexation rule; and the choice of indexation (trend toward price indexation from wage indexation). - Price indexation is fiscally prudent and politically more acceptable as default; discretionary increases can be applied if fiscally and welfare-wise warranted. - Choice of indexation should consider accrual rates and starting pension levels to ensure consumption paths align with social norms and elderly needs (e.g., free healthcare for elderly may justify higher starting benefit with lower indexation). ### Adjusting Contribution Rates and Bases - Contribution rate changes intersect tax policy and pension design. - Reducing the labor tax wedge can encourage labor demand and reduce labor supply disincentives, but payroll taxes differ and must be considered separately. - In earnings-related contributory schemes, contribution rates must reflect pension promises—reducing payroll taxes requires ensuring fiscal sustainability via spending efficiency, reduced benefit generosity (e.g., higher retirement age), or structural/paradigmatic reforms. ### Examples of Structural and Paradigmatic Reforms - Funded reforms and partial privatization: - Partial privatization in the 1990s and early 2000s redirected contributions from public DB schemes to privately managed DC schemes. - Evaluations must include short- and long-term fiscal impacts: size, financing, and maturity of the “transition deficit” (honoring old entitlements while reducing revenues) and impact on long-term net public pension liabilities and whether reductions in DB contributions are accompanied by actuarially fair reductions in benefits. - Welfare assessment: ensure annuity assumptions from the private pillar are realistic. - Preconditions for success: diversified, sufficiently large, liquid supply of investment grade securities and conducive financial sector intermediation. - Reversing funded reforms: - Assess medium- and long-term fiscal and welfare impacts, and effects on reform credibility. - Nationalizing private assets yields immediate positive fiscal and growth effects (lower net public debt and deficits; liquidation proceeds used for investment or consumption), while higher public pension liabilities due to retroactive entitlements mature far in the future. - Because public pension schemes lack long-term balance-sheet reporting, reversal impacts are not obvious from standard public financial reporting—comprehensive evaluation required. - Merging fragmented schemes: - Merge schemes with varying sustainability, adequacy, and efficiency to develop a more integrated, transparent system; grandfather existing entitlements but align new entitlements with best practice. - Risk: more generous predecessor schemes may be the drivers necessitating reform. - Paradigm shifts: - Augment or replace earnings-related schemes with flat non-contributory schemes or introduce public pensions for the first time. - Assess all three macro-critical aspects: sustainability (long-term projections considering aging and growing uptake), adequacy (universal coverage and benefit levels to alleviate old-age poverty), and implement incrementally given fiscal and administrative constraints. - Such shifts often result de facto from progressive reductions in benefit levels aimed at addressing severe short-term fiscal pressures while protecting the poorest, weakening the earnings-related dimension toward a flat-rate, poverty-focused system. ### BOX A1 Funded Reforms: Enabling Conditions - Preconditions across four categories: a comprehensive pension policy, a healthy macroeconomic outlook, financial sector readiness, and implementation capacity. - Pension policy prerequisites: - Clear vision on which system pillars fulfill poverty alleviation, consumption smoothing, and risk pooling. - Broad social and political agreement on objectives and instruments to avoid reversals or major revisions. - If emphasizing consumption smoothing (reinforcing contribution-benefit link), ensure poverty objectives are achieved for low earners and short employment histories. - Recognize funded reforms can be undermined by coverage gaps, benefit inadequacy, or demographic (aging) risks. - Macroeconomic conditions: - Availability of fiscal space and a financing strategy to accommodate the “transition deficit” from channeling contributions to individual accounts instead of current pensions. - Macroeconomic stability—including manageable public debt, government deficits, and inflation—is crucial. - Sound fiscal policies and debt financing strategies contribute to a stable investment environment; exchange rate policies and capital controls permitting international diversification of pension fund portfolios should be in place. - Financial sector readiness: - Efficient, transparent, liquid capital markets and well-regulated financial service providers are indispensable prerequisites prior to introducing privately managed funded arrangements. *Source: ANNEX 1 TYPICAL PENSION POLICY REFORMS (tnmea2022004 - ANNEX 1 TYPICAL PENSION POLICY REFORMS).* ### introduction of funded reforms: reliable trading and settlement platforms, sufficiently deep ### introduction of funded reforms: reliable trading and settlement platforms, sufficiently deep ### ANNEX 2 — Internal and external resources supporting analytical work and policy engagement - Purpose: To identify resources that staff can rely on when establishing whether pension spending is macro-critical, identifying issues to address, and designing reform measures. - Key partners cited: The World Bank, International Labour Organization (ILO), Organisation for Economic Co-operation and Development (OECD), European Commission (EC), European Union (EU) agencies. - IMF Fiscal Affairs Department (FAD) role: - Maintains a list of contacts in the broader social protection sphere. - Available to assist non-specialist staff in identifying pension experts at development partners. - Can provide ad hoc consultation, desk studies, and technical assistance reports (the latter two must be reflected in departmental work programs). ### A — Internal resources - Selected papers and books discussing global and regional pension policy issues (titles preserved exactly): - Pension Reform and the Fiscal Policy Stance (December 2001) - The Role of Private Sector Annuities Markets in a Private Pension System (May 20 02) - Pension Reform, Investment Restrictions and Capital Markets (September 2004) - Pension Reform and Macroeconomic Stability in Latin America (May 2007) - Pension Privatization and Country Risk (August 2008) - Public Pension Reform: A Primer (February 2007) - Fiscal Monitor (semiannual, with annex on pension and health spending projections) - Stress Test for Defined Benefit Pension Plans – A Primer (February 2011) - Pension Reforms in Emerging Europe (Apr i l 2011) - A Fiscal Indicator for Assessing First and Second Pillar Pension Reforms (Apr i l 2011) - Private Pension Systems in Europe: The Uncertain Road Ahead ( June 2011) - The Challenge of Public Pension Reform in Advanced and Emerging Economies (December 2011) - Equitable and Sustainable Pensions: Challenges and Experience ( June 2014) - Automatic Adjustment Mechanisms in Asian Pension Systems? (December 2016) - Long-Run Biological Interest Rate for Pay-As-You-Go Pensions in Advanced and Developing Countries (Apr i l 2017) - The Future of Savings: The Role of Pension System Design in an Aging World (January 2019) - Demographics, Pension Systems and the Saving-Investment Balance (December 2018) - Country-specific technical assistance reports: available for numerous countries including Afghanistan, Angola, Antigua and Barbuda, Argentina, Azerbaijan, Barbados, Belarus, Bolivia, Brazil, Bulgaria, Chile, China, Colombia, Czech Republic, Cyprus, Dominica, Ecuador, El Salvador, Fiji, Greece, Grenada, Honduras, Hungary, Iran, Jamaica, Japan, Jordan, Kenya, Kosovo, Macedonia, Malawi, Malta, Mexico, Moldova, Mozambique, Nepal, The Netherlands, Nicaragua, Oman, Panama, Russia, Paraguay, Poland, Portugal, Romania, Rwanda, Serbia, Slovenia, Spain, Sudan, Swaziland, Tanzania, Thailand, Trinidad and Tobago, Zambia, Zimbabwe, Ukraine, Uruguay, Vanuatu, etc. - Data and projections: - FAD regularly publishes long-term projections of public pension expenditures as annexes to the Fiscal Monitor. - Projections are based on data from development partners—primarily the World Bank, OECD, ILO, and EC—and assumptions reflecting historic trends. - Projections are updated when new data become available (base year expenditure and drivers: demographics, labor force participation, benefit levels, etc.). - For EU member states, the triannual EC Aging Report provides detailed projections that are reflected in the Fiscal Monitor tables; for all other countries, FAD estimates are presented in the tables. - Projections reflect the impact of demographics and policies already legislated whose impact manifests over a longer time horizon. - FAD has a tool that allows staff to identify how reforms to benefit levels, retirement ages and contributions would impact baseline financial sustainability projections. - Analytical toolkits: - Pension Template: - Allows examination of broad pension reform options using a simple model. - Provides a bird’s eye view and can illustrate tradeoffs among reform options (retirement ages, benefit generosity, contribution rates). - User-friendly interface with pull-down menus. - Produces long-term fiscal and welfare (replacement rate) projections. - Results are indicative and cannot substitute for in-depth analyses and more granular projections. - The Template is undergoing final revisions and is expected to become available in May 2021. - Expenditure Assessment Tool (EAT): - Excel-based tool to assess public expenditures in international comparison. - Provides a starting point to guide more detailed sectoral analysis; not a substitute for an in-depth spending review. - Pensions Knowledge Exchange website: - Presents basic regulatory information and country-specific indicators. - Offers a simple framework for analyzing pension expenditures and drivers. - Provides answers to common questions from FAD cooperation with other departments and short technical notes on public pension system features. - Access note: Some reports are confidential or strictly confidential; access can be granted only by the ministry identified in the report as the IMF’s counterpart. ### B — External resources - Regulatory information sources (structure and basic features of pension systems): - Social Security Programs Throughout the World — standardized, country-specific information for all social security programs; monthly summaries of legislative changes and topical studies. - International Labour Organization – International Social Security Association (ISSA) — country-profile descriptions of regulatory features, recent reforms, and links to relevant papers and studies. - European Commission – Ageing Report Country Fiches — in-depth descriptions of social security regulations and changes since the last report; most recent vintage is 2018. - Pension Watch (HelpAge International) — country-specific descriptions of social pensions (eligibility, amounts, uptake, cost). - Data resources (freely accessible and regularly updated): - UN Population Division: - Historic and projected population data by gender and by five- and single-year age groups until 2100, according to various assumptions. - Age-specific and aggregate fertility, mortality, and migration data and an archive of earlier vintages. - International Labour Organization (ILO): - Compiles numerous databases related to labor markets and social protection; vintages often old. - Important data sets include: (1) Social Security Expenditure Database (old-age, disability, survivor pensions, family allowance, unemployment benefit expenditures, by country, year) and (2) Labor force data: employment, informality, labor force participation, etc. by age, gender, and country and in cross-country tabulations; and the World Social Protection Database. - ILO World Social Protection Report provides a broader universe of social protection programs. - Eurostat: - ESSPROS (European System of integrated Social Protection Statistics) collects quantitative information from member states on social protection, including pensions (expenditures, beneficiaries, benefits, by gender, age, and covered risk). - Detailed labor market information available. - European Commission Ageing Working Group: - Ageing Report includes country-specific projections and cross-country comparative tables on pensions, health, education, and long-term care. - Tables present estimates for variables used in projections: demographics (fertility, mortality, migration), labor market and employment, coverage and compliance, beneficiary numbers by type of risk and gender, replacement rates and benefit ratios. - World Bank Pensions Data: - Global pension data covering expenditures, contribution rates, DB scheme parameters, structure, qualifying conditions, contribution rates, and coverage. - ASPIRE (Atlas of Social Protection Indicators of Resilience and Equity) database: aggregate and distributional data covering labor markets, social assistance (including social pensions), and contributory and non-contributory pensions by country, gender, year, income quintile, etc. - OECD: - Statistics subpage presents pensions-related data sets covering design, replacement rates, demographics, pension wealth, income, and poverty among the elderly. - Makes tables and data underlying its pension publications available and downloadable. ### Selected external publications (representative titles as listed) - Beyond Contributory Pensions: Fourteen Experiences with Coverage Expansion in Latin America (Rofman, Rafael, Ignazio Apella, Evelyn Vezza, World Bank, Washington, DC, 2015) - Live Long and Prosper: Aging in East Asia and the Pacific (World Bank, Washington, DC, 2016) - Extending Pension Coverage to the Informal Sector in Africa (Guven, Melis, World Bank, Washington, DC, 2019) - The Inverting Pyramid: Pension Systems Facing Demographic Challenged in Europe and Central Asia (Schwarz and others, World Bank, Washington, DC, 2014) - Pensions for Public Sector Employees: Lessons from OECD Countries’ Experience (Whitehouse, Edward, World Bank, Washington, DC, 2016) - Arab Pension Systems: Trends and Challenges an Options for Reform (World Bank and Arab Monetary Fund, Washington, DC, 2017) - Pension Funds, with Automatic Enrollment Schemes: Lessons for Emerging Economies (Heinz, Rudolph, World Bank, Washington, DC, 2019) - Pension Patterns in Sub-Saharan Africa (Dorfman, Mark, World Bank, Washington, DC, 2015) - Pension Panorama: Retirement-Income Systems in 53 countries (Whitehouse, Edward, World Bank, Washington, DC, 2007) - Enabling Conditions for Second Pillars of Pension Systems (Heinz, Rudolph, and Roberto Rocha, World Bank, Washington, DC, 2009) - Pension Markets in Focus 2019 (series) - Pension Outlook 2018 (series) - Pensions at a Glance (series) - Ageing and Pensions: The Challenges Facing Pension Systems (Pablo Antolín-Nicolás, Organisation for Economic Co-operation and Development, Paris, 2015) - Pension Reform in Central and Eastern Europe: In Times of Crisis, Austerity and Beyond (International Labour Organization, Geneva, 2011) - Reversing Pension Privatizations. Rebuilding Public Pension Systems in Eastern Europe and Latin America (International Labour Organization, Geneva, 2018) - Better Pensions, Better Jobs: Towards Universal Coverage in Latin America and the Caribbean (Bosch, Mariano, Ángel Melguizo, and Carmen Pagés, Inter-American Development Bank, Washington, DC, 2013) - The Taxation of Pensions (Holzmann, Robert, and John Piggott (editors), MIT Press, 2018) - Building Social Protection Systems: International Standards and Human Rights Instruments (International Labour Organization, 2021) - Good Intentions, Bad Outcomes: Social Policy, Informality, and Economic Growth in Mexico (Levy, Santiago, The Brookings Institution, Washington, DC, 2008) - Do Payroll Tax Cuts Boost Formal Jobs in Developing Countries? (Pagés, Carmen, IZA – Institute of Labor Economics, 2017) *IMF Technical Notes and Manuals 22/04 | 2022 — ANNEX 2: Internal and External Resources Supporting Analytical Work and Policy Engagement* --- _Source: https://www.imf.org/-/media/files/publications/tnm/2022/english/tnmea2022004.pdf_