## It's the Years, Not The Mileage: IMF Analysis of Pension Reforms in Advanced Economies _IMF Blog, February 1, 2012_ ## Source details **Canonical URL:** [It's the Years, Not The Mileage: IMF Analysis of Pension Reforms in Advanced Economies](https://www.imf.org/en/blogs/articles/2012/02/01/its-the-years-not-the-mileage-imf-pension-reforms-in-advanced-economies) ## Other formats - [Markdown version](/en/blogs/articles/2012/02/01/its-the-years-not-the-mileage-imf-pension-reforms-in-advanced-economies/index.md) - [Structured JSON version](/en/blogs/articles/2012/02/01/its-the-years-not-the-mileage-imf-pension-reforms-in-advanced-economies/index.json) - [Bundle manifest](/en/blogs/articles/2012/02/01/its-the-years-not-the-mileage-imf-pension-reforms-in-advanced-economies/bundle-manifest.json) ## Bibliographic details - Authors: Benedict Clements - Published: February 1, 2012 --- ### Key findings - Pension spending has risen from 5 percent of GDP in 1970 to 8½ percent in 2010. - Pension spending now accounts for about a fifth of government spending. - Pension spending is expected to rise on average by 1 percentage point of GDP, and over 2 percentage point of GDP in over 9 countries. - Gradual increases in retirement ages already legislated in many advanced economies are expected to increase the retirement age by about one year over 1990–2030. - Life expectancy at retirement increased by roughly five years over 1990–2030, outpacing the average legislated increase in retirement ages. - Raising retirement ages by another 2½ years by 2030 —about 1½ months per year— would reduce pension spending in advanced economies by an average of 1 percentage point of GDP. ### Pension spending trends and fiscal pressures - Aging populations and increases in pensions relative to wages pushed public pension spending from 5 percent of GDP in 1970 to 8½ percent in 2010. - Higher pension spending has helped alleviate old-age poverty in many countries, but has also put pressure on public finances. - The appropriate level of pension spending is ultimately a question of public preference, but many countries need fiscal adjustments that will include big-ticket items such as pensions. - In countries where pension spending will continue to rise under current policies, pensions must be part of fiscal consolidation strategies. ### Outlook and risks ahead - Pensions are vulnerable to demographics: more retirees will consume what fewer workers produce. - There is upside risk to projected spending: - Life expectancy has consistently outstripped projections, adding fiscal costs. - Some official projections use optimistic productivity assumptions relative to the recent past. - Popular resistance could delay or impede reforms already legislated, increasing future spending. - From a fiscal perspective, taming public pension spending will be difficult given population aging. ### Policy options and rationale - Main reform options: - Gradually raising retirement ages. - Cutting pension benefits. - Increasing revenues (for example, payroll contributions). - Reasons to favor gradually raising retirement ages in many advanced economies: - In countries with already high tax burdens, further contribution hikes may jeopardize competitiveness and growth. - Raising the retirement age can help boost GDP by increasing the number of years the average person spends working rather than in retirement. - It can avoid larger cuts in benefits than those already legislated, reducing impacts on elderly poverty. - Raising retirement ages may be easier for the public to understand than cutting pensions or increasing contributions. - Increasing the number of older workers should not necessarily reduce employment opportunities for younger generations, analogous to the increase in female labor force participation not reducing jobs for men. ### Quantitative impact of raising retirement ages - Average expected increase in retirement age due to legislated reforms: about one year over 1990–2030. - Incremental policy proposal: raising retirement ages by another 2½ years by 2030 —about 1½ months per year—. - Fiscal effect of that proposal: would reduce pension spending in advanced economies by an average of 1 percentage point of GDP. ### Safeguards, distributional considerations, and complementary measures - Reforms raising retirement ages must be accompanied by adequate disability pensions and social assistance programs to protect those who cannot extend their work lives. - Longevity gains may not be uniform; longevity might not be increasing as fast for lower-income groups as for the rest of the population. - Where benefits are high, some countries could consider reducing pensions, but benefit cuts for those close to the poverty line should be avoided. - Where payroll contribution rates are relatively low, some countries could consider raising contributions; to minimize impacts on low-income workers, measures such as raising the caps on contributions could be considered. - Health care spending is an even bigger challenge than pensions and tackling both should be key components of fiscal adjustment plans. ### Conclusions - Advanced countries face difficult choices in fiscal adjustment; pension reforms will need to be part of the picture while preserving pensions’ role in reducing old-age poverty. - Pension issues are also important in emerging economies and will be the topic of future analysis. *Benedict Clements, February 1, 2012* --- ## References - [study](http://www.imf.org/external/pp/longres.aspx?id=4626) - [https://www.imf.org/wp-content/uploads/2012/02/pension-blog-post-fig1_1feb2012.jpg](https://www.imf.org/wp-content/uploads/2012/02/pension-blog-post-fig1_1feb2012.jpg) - [https://www.imf.org/wp-content/uploads/2012/02/pension-blog-post-fig2_1feb2012.jpg](https://www.imf.org/wp-content/uploads/2012/02/pension-blog-post-fig2_1feb2012.jpg) - [health care spending](http://blogs.imf.org/2011/02/08/healing-public-health-care/) _Source: https://www.imf.org/en/blogs/articles/2012/02/01/its-the-years-not-the-mileage-imf-pension-reforms-in-advanced-economies_