What Makes Pension Reforms Sustainable?

Aaron Grech

doi:10.3390/su10082891

Abstract

Policymakers pushing pension reforms have tended to justify changes on the basis that they would make systems more sustainable by lowering future spending on pensions. This is a rather narrow interpretation of sustainability that fails to consider that other fiscal programs may need to accommodate the impact of reforms that reduce pension system adequacy. In this light, this article argues that in order to correctly assess the sustainability of pension reforms, one needs to adopt a more holistic framework that encapsulates the interaction between pension system goals and constraints. In a number of countries, reforms focused solely on reducing future spending were followed by reforms that restored generosity. A holistic approach to assess pension sustainability could help limit this cycle of reform and increase trust in pension systems.

Highlights

State pension systems are the cornerstones of modern welfare states in many senses
Van Kersbergen and Hylands [16] and Fedotenkov and Meijdam [17] noted that in advanced countries, despite a severe fiscal and economic shock, the standard reaction has been to boost social programs, rather than to cut back. This suggests that policymakers are moving somewhat beyond the narrow interpretation of pension system sustainability that was adopted in previous decades, under which to be sustainable, spending on pensions was expected to remain unchanged or even fall
The impact of these changes on system goals and constraints could mean that the pace of the cycle of reforms could slow down, but unless future reforms adopt a more holistic approach to assess pension system sustainability, it is likely that the process of to-and-fro will continue

Summary

Introduction

State pension systems are the cornerstones of modern welfare states in many senses. Holzmann and Hinz [1] portrayed their rise as a reaction to the societal and economic changes of the nineteenth century, with the informal arrangements that had existed in traditional agricultural communities being replaced by arrangements that enabled industrial workers to smooth their income over their lifetime and prevent poverty in old age. Van Kersbergen and Hylands [16] and Fedotenkov and Meijdam [17] noted that in advanced countries, despite a severe fiscal and economic shock, the standard reaction has been to boost social programs, rather than to cut back This suggests that policymakers are moving somewhat beyond the narrow interpretation of pension system sustainability that was adopted in previous decades, under which to be sustainable, spending on pensions was expected to remain unchanged or even fall. The recent evolution of pension reforms suggests that citizens appear to be accepting a smaller role for income smoothing through the pension system, while accepting that longevity requires longer effective working lives The impact of these changes on system goals and constraints could mean that the pace of the cycle of reforms could slow down, but unless future reforms adopt a more holistic approach to assess pension system sustainability, it is likely that the process of to-and-fro will continue

Pension Reforms—Cyclical Tendency or Secular Trend

Findings

Discussion