Pension Deliberations at OECD Level

Public Services International's Research Network Newsletter NO. 17, May 12, 1998

The following is a condensed summary of deliberations currently taking place in various OECD committees under the heading: maintaining prosperity in an ageing society. Since the end of World War II public pensions have become the dominant source of income in old age, and the number of persons eligible for them has increased rapidly. It has nevertheless been possible to raise individual pensions markedly in real terms with only incremental increases in contribution rates in most OECD countries. This is because, despite earlier retirement and rising unemployment, the proportion of the population that is working - and hence contributing to the public pay-as-you-go pension systems - has increased. However, this state of affairs is going to change in the coming decades as the baby-boom generation is moving into retirement and their relatively few children are going to take over the role of contributors to the pension schemes. The result will be that public finances will come under sustained strain unless the system is reformed.

The reform currently under discussion should result in:

 

  • reduced growth in public expenditure related to pensions and health
  • a slowing or reversal of trends towards longer periods of retirement
  • more productive investment of private savings for retirement
  • greater individual choice over life-course decisions such as the decision to retire
  • a general re-orientation of health, employability, care and other policies so they better support people, as they grow older, in leading productive lives in the society and economy.

Seven principles have been identified to guide these reforms:

  1. Public debt-to-GDP ratios should be reduced in anticipation of future fiscal pressures that are likely to be severe.
  2. Retirement income should be provided through a balanced mix of pension and other elements.
  3. Incentives to working longer should be increased.
  4. There should be an integrated approach to infrastructure development for financial markets and funded pension systems.
  5. Investment in human resource development should take account of the importance of a productive life in the economy and society as people grow older, including longer working lives and job changes later in life.
  6. Medical expenditure should be more focused on reducing dependence and time in chronic care and explicit policies should be developed for providing care to frail elderly people.
  7. Strategic frameworks should be put in place at the national level now in order to harmonise these ageing reforms - including an implementation timetable, to build public understanding and support, and to provide the supporting infrastructure of data, analysis and budgeting tools.

These principles and solutions, outlined in a summary by the OECD Secretariat in preparation for a Ministerial Council meeting on 27-28 April, are the basis for ongoing and further deliberations.

It is clear that the ministers are facing a real challenge.

How to ensure an adequate material living standard for older people without placing an unfair burden on other citizens? Presently, the OECD solutions outlined seem to be increased time in employment, more productive employment more productive investment of savings for retirement.

The next round of consultations will take place 23-24 June. The Trade Union Advisory Committee to the OECD, TUAC, will prepare a statement prior to that meeting, which will be made available from TUAC, 26, avenue de la grand-armée, 75017 Paris 17e; fax: +33.1.47.54.98.28; phone: +33.1.47.63.42.63; email: tuac@oecd.org, and which will also appear on the TUAC web-site [www.tuac.org].

Picking up on the point of more productive investment of savings for retirement it should be noted that Americans have debated investing social security funds in the stock market for years. This debate was re-launched about three months ago by President Clinton. Although some voices point out that senior citizens could be left at the mercy of a volatile stock market that will not necessarily continue to outperform government bonds, more and more politicians seem to feel that Americans are increasingly confident in their ability to take care of themselves. According to the International Herald Tribune, 28 April, Senator Daniel Patrick Moynihan of New York and Senator Bob Kerrey of Nebraska have introduced a plan that would cut Social Security taxes by 2 percentage points and leave it to individuals to decide whether to invest their tax savings for their retirement or spend part of it.

Meanwhile in Canada, legislation establishing the change from investment in government bonds to the stock market is now in place. The government has assured workers that their pensions would be paid even if the stock market plunges. If stocks do poorly, contributions will be increased to offset any market losses. If stocks do well, the profits will curb any rise in contributions, and may even produce a reduction (Wall Street Journal Europe, 31 March).

Is playing the stock market really the best solution to ensure decent pensions for future retirees? The risk is that the future of ordinary people will be totally dependent on the ups and downs of Wall Street, the professional investors and the blue-chip companies they invest in, some of those being the very same companies that cut the work force in the name of productivity - to attract investors.

Economic Policy Institute, Center on Budget and Policy Priorities Readers with access to the web may be interested in exploring other views on issues related to ageing e.g. [epinet.org/ib 125.html], www.cbpp.org/424socsec.htm.

 

Global Action on Aging
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Phone: +1 (212) 557-3163 - Fax: +1 (212) 557-3164
Email: globalaging@globalaging.org
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