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Global Trends in Public Pension Spending and Outlook

Benedict Clements Fiscal Affairs Department International Monetary Fund


January 2013

This presentation represents the views of the author and should not be attributed to the IMF, its Executive Board, or its management.

Plan of Presentation
I. Trends and drivers of public pension spending in advanced and emerging economies

II. Fiscal context and projected spending increases III. Risks to projections

IV. Conclusions

I. Trends and drivers of public pension spending

After rapid increases over 1970-1990, reforms have slowed the growth of public pension spending advanced economies
18 16 14 Pension Spending, percent of GDP 12 10 8 6 4 2 0 Lowest Average Highest

1970

1980

1990

2000

2010

Sources: OECD, EC, ILO, UN, and IMF staff estimates. Note: The average includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The lowest/highest refers to the single country with the lowest/highest spending.

Higher replacement rates and aging have driven spending in advanced economies
Evolution of Public Pension Expenditures in Advanced Economies, 19702010 (Percent of GDP)
3
2.0

Contribution to Spending Growth

2 1 0
-0.1 0.9 0.3

1.5

1.1

-1 -2 -3 Labor force participation Replacement rate

-0.6

-0.5

1970-1990 (Advanced)
Sources: OECD, EC, ILO, UN, and IMF staff estimates.

1990-2010 (Advanced)

Replacement rate

Labor force participation

Eligibility

Eligibility

Aging

Aging

Trends vary across countries

12.0

Australia

Japan

Korea

New Zealand

10.0

Pension Spending, percent of GDP

8.0

6.0

4.0

2.0

0.0 1970 1980 1990 2000 2010

Sources: OECD, ILO, UN, and IMF staff estimates.

Higher replacement rates and aging have driven spending in advanced economies
Evolution of Public Pension Expenditures in Advanced Asia and Pacific, 19902010 (Percent of GDP)
5 Contribution to Spending Growth
4.8

2.7

0.7

0.5

-1

-0.4

-0.2

-0.4

-3 Labor force participation Eligibility Replacement rate Aging Aging

-2.3

1990-2010 (Australia)
Sources: OECD, ILO, UN, and IMF staff estimates.

1990-2010 (Japan)

Replacement rate

Labor force participation

Eligibility

Higher replacement rates and aging have driven spending in advanced economies
Evolution of Public Pension Expenditures in Advanced Asia and Pacific, 19902010 (Percent of GDP)
2
0.9 1.1 0.9

Contribution to Spending Growth

0.1

-0.1

-0.1 -0.8

-2

-4 Labor force participation Replacement rate Eligibility Aging Aging

-3.8

1990-2010 (Korea)
Sources: OECD, ILO, UN, and IMF staff estimates.

1990-2010 (New Zealand)

Replacement rate

Labor force participation

Eligibility

Large increases in pension spending in emerging economies, but from low level in Asia
Evolution of Public Pension Expenditures in Emerging Economies, 19902010 (Percent of GDP)
12 Emerging Europe 10 Pension Spending, percent of GDP

Other Emerging

Emerging Asia

0 1990 2000 2010


Sources: OECD, EC, ILO, UN, and IMF staff estimates. Note: Emerging Europe includes Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Turkey, and Ukraine. Emerging Asia includes China, India, Indonesia, Malaysia, Pakistan, Philippines, and Thailand. Other emerging includes Argentina, Brazil, Chile, Colombia, Egypt, Jordan, Mexico, Saudi Arabia, and South Africa.

Higher replacement rates and aging have driven spending in emerging economies
Evolution of Public Pension Expenditures in Emerging Economies, 19902010 (Percent of GDP)
3 Contribution to Spending Growth
2.1

2 1 0

1.8 1.0 0.7 0.7 0.2 0.0 0.9 0.0

-0.4

-0.3

-1 -2 -3
-1.5

Replacement rate

Replacement rate

1990-2010 (Emerging Europe)

1990-2010 (Other Emerging)

1990-2010 (Emerging Asia)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Replacement rate

Labor force participation

Labor force participation

Labor force participation

Eligibility

Eligibility

Eligibility

Aging

Aging

Aging

10

Variation in spending reflects differences in aging, system generosity, and coverage rates
Pension Spending, Replacement Rates, and Aging, 2010
20 20

Advanced Spending (percent of GDP)

Emerging

UKR
Spending (percent of GDP) 16 16

12

ITA AUT FRA PRT GRC BEL GER FIN JPN SVN SWE ESP CHE DNK CZENLD LUX NOR USA SVK GBR NZL CAN AUS IRL ISL KOR

12

HUN
8

POL BRA TUR

0
0 10 20 30 40 50 60 70
16 14 12 10 8 6 4 2 0 -80

0
0

EST RUS LTU ROM ARG BGR LVA CHL JOR EGY CHN MYS SAU ZAF MEX PHL THA IND IDN PAK
10 20 30 40 50

60

70

Replacement Rate (percent of average wage) Old-age dependency ratio=0-10 Old-age dependency ratio=20-30
120

Replacement Rate (percent of average wage) Old-age dependency ratio=10-20 Old-age dependency ratio=30-40

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

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II. Fiscal context and projected spending increases

12

Debt ratios remain at historic levels in advanced economies


Public Debt, percent of GDP
140

120

World War II

Great Recession

100

Advanced
80

60

40

Emerging
20

1880 1886 1892 1898 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012

13

Source: IMF.

Substantial adjustment is needed to bring debt ratios to appropriate levels in advanced economies
Illustrative Adjustment Needs, percent of GDP

20

16

12 9.5 8

-4

Source: IMF.

14

Emerging economies are in a stronger overall fiscal position, but some countries are vulnerable
Illustrative Adjustment Needs, percent of GDP
10

2 0.2 0

-2

-4

-6

Source: IMF.

15

Implications for fiscal policy and pensions


Fiscal adjustment needs are high in many advanced economies Measure of needed fiscal adjustment does not take into account projected increases in pension and public health spending

Containing increases in pension spending may be needed to support fiscal adjustment


Emerging economies have more fiscal space

16

-4 -2 0 0 2 4 6 4 6 8

-2

Turkey Luxembourg Korea Slovenia Belgium Netherlands New Zealand Norway Malaysia Switzerland Ukraine Finland Romania Argentina Brazil Mexico Latvia Philippines South Africa Lithuania Thailand Indonesia Pakistan Greece India Bulgaria Chile Poland Estonia Hungary France Czech Republic Japan Denmark Sweden Italy Canada United States Germany Austria Australia Ireland Portugal Slovakia Spain United Kingdom Iceland Egypt China Jordan Russia Saudi Arabia

Pension spending pressures will intensify in many countries between 2010 and 2030

Sources: OECD, EC, ILO, UN, and IMF staff estimates.


Average=1.2
Average=1.0

Increase in Pension Spending, 20102030 (Percent of GDP)

17

Enacted reforms are expected to help contain impact of population aging on spending in advanced economies
Evolution of Public Pension Expenditures, 20102030 (Percent of GDP)

Contribution to Spending Growth

6
4.5 3.2

4 2 0
-0.3
-1.3 -1.4

-0.1 -0.8

-0.4

-2 -4 -6

Aging

Labor force participation

Aging

Replacement rate

2010-2030 (Other Advanced)

2010-2030 (Advanced Asia and Pacific)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Replacement rate

Labor force participation

Eligibility

Eligibility

18

Enacted reforms are expected to help contain impact of population aging on spending in most emerging regions except for Asia
Evolution of Public Pension Expenditures, 20102030 (Percent of GDP)
6
4.1

4
2.7

2 0
-0.3 -0.4 -1.1 -1.8 -0.3

1.4 0.0 0.0 0.0

-2
-4 -6

-1.5

Labor force participation

Labor force participation

Replacement rate

Replacement rate

2010-2030 (Emerging Europe)

2010-2030 (Other Emerging)

2010-2030 (Emerging Asia)

Sources: OECD, EC, ILO, UN, and IMF staff estimates.

Replacement rate

Labor force participation

Eligibility

Eligibility

Eligibility

Aging

Aging

Aging

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III. Considerable uncertainty and upside risks to projections


Demographic and macroeconomic risks High longevity (>1 percentage point of GDP in 2030 spending) Low productivity (>0.5 percentage points of GDP in 2030 spending) Czech Republic, Russia, Slovakia, and Ukraine

Italy, Portugal, and Spain

Labor force participation (>0.5 percentage points of GDP in 2030 spending)

Czech Republic, Japan, Korea, the United Kingdom, and the United States

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Considerable uncertainty and upside risks to projections


Other risks Reform reversal (Reform impact >5 percentage points of GDP in 2030 spending) Shortfalls in private DB plans (DB plans 30 percent or more underfunded in 2009) Austria, France, Hungary, Italy, and Poland

Belgium, Japan, and Sweden

High share in private DC plans (Pension fund assets >40 percent of GDP)

Australia, Canada, Denmark, Finland, Iceland, Ireland, Netherlands, Switzerland, the United Kingdom, and the United States

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IV. Conclusions
Public pension spending has increased in advanced and emerging economies since 1970s Aging will put pressure on pension spending in coming decades, with many emerging economies starting from lower levels

Upside risks to projections and uncertainties


Containing increases in pension spending in advanced economies may be needed to support fiscal adjustment

Some but not all emerging economies have fiscal space that could be used to expand pension coverage
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Thank you!

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