pension liabilities in a context of an ageing population: the portuguese case workshop on pensions...

Pension liabilities in a context of an ageing population: the Portuguese casePension liabilities in a context of an ageing population: the Portuguese caseWorkshop on PensionsWorkshop on Pensions

OECD - ABS, Canberra 22-24 April 2013OECD - ABS, Canberra 22-24 April 2013

Ana M. de AlmeidaDeputy-Director | Statistics Department

Pension liabilities in a context of an ageing

population:

the Portuguese case

OECD – ABS Workshop on PensionsCanberra, 22-24 April 2013



OUTLINE

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1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL

2. AGEING IN EUROPE – Trends; Economic impacts

3. STYLIZED FACTS FOR PORTUGAL – Population; pension liabilities

4. SOME CONCLUSIONS



1. DEMOGRAPHIC TRENDS at a Glance - Finance & Development, IMF, June 2011

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Film



1. DEMOGRAPHIC OVERVIEW AT A WORLDWIDE LEVEL – UN

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In the last decade, world

total population

increased from 6.1 bn (2000)

to 7.0 bn (2012).

Since 2011, population

annual growth remains around

0.1%, approximately.

World demographic trend: 2000-2012


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Asia is the most populous

continent. It hosts 60% of the

world's population.

Europe is the third-most populous

continent, with 11% of the world

´s population.

World demographic picture: Country ranking - 2012


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According to the World Bank estimates, in July 2012 the world population accounted for more than 7 billion individuals.

As the world’s population grows, it is also ageing, in particular in developed countries. By 2050, the world population of those over the age of 60 is projected to triple, reaching 2 billion people.

Europe has the highest proportion of older people and this will remain so for decades; more than one third of Europe’s population is expected to be over 60 by 2050.

This requires major policy and a shift in attitudes towards age!


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While the global population is rising, Europe’s population is proportionally diminishing.

Increase in life expectancy – people live longer;

Decrease of the fertility rate – having fewer children,“baby-bust” followed the “baby boom” of the post - II W War;

Increasing mobility and immigration – European societies are becoming more diverse and immigrants are becoming part and parcel of them.

Ageing affects European countries, with negativeconsequences for the economies.


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Labour market:

• Size and composition of labour supply – the proportion of older workers increases and fewer new workers enter in the labour market. The employment rate of older workers is projected to massively increase from 47% in 2010, to the EU25, to 59% in 2025;

• Under the assumption of unchanged labour productivity growth, demographic trends imply a decline in real GDP growth from its average 1995-2005 level of 2.1% to around 1% by 2050.

Government budget:

• Pressure on government financing – ageing related expenditure; increasing in budget deficits related to expenditures for pensions, health care, social assistance, unemployment;

• According to the European Central Bank, for most euro area countries, in the absence of any reform, the demographic change will cause an increase of 3 p.p. approximately in GDP due to pension expenditures in 2050.

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Economic and social concerns for the European economics are being discussed in the literature:

• Population ageing will emerge as a key trend in Western economies over the next decades. Population ageing will contribute to a reshaping of the labour force. However, it will also lead to an increase in dependency ratios (i.e., an increase in the share of retirees in overall population) and, consequently, in the average marginal propensity to consume, shifting saving/consumption decisions and having an impact in the global saving and investment balance.

• The ageing trend is likely to drive a protracted reduction in saving ratios in Western economies, which relied significantly on the saving for retirement by the baby-boom generation. The decline in savings will determine an increase in worldwide real interest rates, with non-negligible impacts in global investment and technical progress, limiting potential output growth.



• In addition, the ageing trend will simultaneously increase age-related public spending and narrow the tax bases, raising issues on the sustainability of public debt (ECB 2012, Merola and Sutherland).

• It should be highlighted that the pay-as-you-go nature of most pension systems will necessarily limit social security revenues and will increase outlays. Given the public nature of most pension systems, imbalances in the social security are a contingent claim on Government revenues, thereby playing a key role on debt sustainability.

• Population ageing will be even more important for European Union economies, in particular for those which are subject to a common monetary policy. A coordinated policy response would be key in fostering economic and financial stability in the euro area.

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Demographic trend - Portugal

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Macroeconomic projections – Portugalas % of GDP

Source: “The 2012 Ageing Report”



Statistical data play an important role in measuring the impact of ageing for pension liabilities – a crucial tool to help policy makers!

Portugal was a member country of the Contact Group on the statistical measurement of the assets and liabilities of pension schemes in general government, which was established by the Committee of Monetary, Financial and Balance of Payments Statistics (CMFB) in 2008.

In that concern some work was developed in order to evaluate the pension entitlements for the Portuguese economy. A contract between Banco de Portugal and the Research Center for Generational Contracts of the Albert-Ludwigs Universität Freiburg was signed to develop a report and an estimation for the Portuguese pension entitlements.


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The model, developed in accordance with the TF/CG conclusions, aims to estimate the accrued-to-

date liabilities of the base year: present value of pensions in disbursement; present value of future

pensions due to past and current contributions of present workers:

This means that in every period , the existing retirees pension benefits and the pension rights

accrued until the base year , which are both discounted by the factor for every future

year , are multiplied by the number of members of the age cohort . This is done for every

age-group, beginning with the ones born in , which goes back 100 years prior to the base

year.


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Pension liabilities for Portugal 2007-2011:


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Portuguese pension entitlements

increased between 2007-2010 .

In 2011, pension liabilities were

about 326% of GDP.Social Security

represents around 70% of the total

pension liabilities.



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Portuguese recent reforms (2006-2008):

• The inclusion of a sustainability factor in accordance with changes in the life expectancy;

• Indexing rules – pensions are now linked to CPI and to the real GDP growth;

• Lifetime wages (up to a maximum of 40 years) are accounted for and accrual rates are set according to the workers’ wages and the length of their contributory career;

• Reinforcing the mechanisms for the protection of long contributory careers; introducing a ceiling to higher pensions; and promoting active ageing (giving bonuses to those who decide to extend their working lives beyond the legal retirement age and increasing penalties for early retirements).



Population data used for the estimations:

Under the model used in Portugal, the starting point of the projection is the population structure by age and gender observed at the start of the respective year, the remaining projected years, fertility rates, mortality rates and life expectancy, are derived from EUROPOP projections.

Population contributors and beneficiaries – broken down by type of pension (old age, survivors and disability), and reported by Social Security (SS) and Civil Servants’ pension scheme (CGA).


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Pension profile of SS and CGA, Average benefit per participant (2011, in EUR)

The calculation suggests a

drop of benefits for

cohorts aged 65 and older.

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Population projection for Portugal (2010-2060) EUROPOP 2010


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Film



As in most European countries, Portugal faces the challenge of an ageing society which pressures, from a long term perspective, the Portuguese pension system:

Decrease of total population (trend projected 2010-2060);

Increase in the old dependency ratio;

Increase in the life expectancy;

Decrease of the fertility rates;

Increase of the number of pensioners and total amount of benefits;

Decrease in the proportion of active people and total amount of contributions.

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4. MAIN CONCLUSIONS



. In the last years Portuguese governments took some reforms (especially between 2002 and 2006);

Countries should be aware of the consequences, namely the impact on pension liabilities and develop effective policies to promote a sustainable social security system;

. Statistical data is a fundamental tool to provide a picture of the state of the art and the development of models to estimate pension liabilities is a useful tool.

4. MAIN CONCLUSIONS

The challenge is to ensure that the demographic trends promote

sustainable economic growth, ensure international security and allow for the values of democracy

and human rights.

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Thank You for your attention !

Any questions?

Ana M. de [email protected]

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pension liabilities in a context of an ageing population: the portuguese case workshop on pensions...

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