Multi-pillar Systems Research Articles

Changes in Private Pensions and Income Inequality in Retirement: A Decomposition Analysis by Income Source in Nine European Countries (1986–2018)

AbstractPrivate pensions have expanded in recent decades in many European countries, albeit to different extent. As private pensions historically have been more unequally distributed than public pensions, it is reasonable to expect that pension privatization has increased the dispersion of incomes among the retired. However, few studies have empirically tested this claim. The purpose of this study is to assess how the expansion of private pensions affects developments of income inequality among the retired. Using microdata from the Luxembourg Income Study, decomposition analyses of income inequality by income source are conducted around 1986 and 2018 in nine European countries. To account for cross-country variations in the public–private pension mix, the study distinguishes between mature multi-pillar systems, emergent multi-pillar systems, and dominant public systems. The results highlight an interesting paradox. Higher shares of private pensions in retirement incomes have a substantial inequality-increasing effect; yet, overall income inequality among the retired has not necessarily increased, for 2 reasons. First, more equally distributed public pensions in emergent multi-pillar systems and declining shares of capital income in mature multi-pillar systems either fully or partially compensated for increased inequality due to larger shares of private pensions. Second, private pensions became more equally distributed among the retired in most countries.

Inequalities and poverty risks in old age across Europe: The double‐edged income effect of pension systems

AbstractWhile the sustainability of pension systems facing demographic ageing has been widely discussed, the adequacy of retirement income has often been neglected in current debate. However, considerable poverty and income inequality in old age exists across Europe. Using recent EU‐SILC data (2017/18), the comparative analysis of poverty rates and income inequality in old age shows important cross‐national variations that need to be seen in context of market‐related inequalities but also the specific pension system. Beveridge basic security is not always capable of effectively reducing poverty despite the explicit goal to do so. In addition, private funded pensions may generate social inequality. Some contributory Bismarckian systems are better suited to reduce poverty, but given their focus on status maintenance also reproduce inequality. Poverty rates are low due to encompassing basic pensions in Dutch and some Nordic multipillar systems and in core Central and Eastern European countries. Bismarckian pensions such as in Germany are generating some inequality and medium level of poverty, while France and some Southern European countries perform better on poverty but reproduce larger inequalities. Beveridge systems such as in the United Kingdom and Switzerland with rather meagre basic multipillar systems have relatively medium to high poverty risks. In addition, the Baltic countries and new EU member states in the periphery have the highest poverty rates across Europe. The analysis shows that the minimum income provision of public pension systems matters most for poverty risks, while the overall pension architecture has an impact on reproducing inequality in old age acquired during working life.

Social rights, social justice and pension outcomes in four multi-pillar systems

Egalitarian liberal justice requires redistributive income transfers to protect the basic liberties of all citizens, yet it has been asserted that privatisation is fundamentally inegalitarian, and therefore likely to impair the autonomy of the least advantaged. This article assesses the redistributive potential of public and private pension arrangements by simulating the probable outcomes for individuals across a range of circumstances under the multi-pillar retirement systems of Britain, Germany, Italy, the Netherlands and Switzerland. The findings show that the public pensions model may compare unfavourably with systems that rely substantially on privately administered provision when both are appraised in terms of distributive justice. In just systems, what counts is the role and scope of the public authority in framing and securing compliance with egalitarian aims and objectives, not the locus of retirement scheme administration.

The gender impact of social security reform

As populations age and revenues diminish, government and private pension funds around the world are facing insolvency. looming social security crisis is especially dire for women, who generally live longer than men but have worked less in the formal labor force. This groundbreaking study examines alterantive social security systems and their disparate impacts on men and women. Emphasis is placed on the new multi-pillar systems that combine a publicly managed benefit and a mandatory private retirement saving plan.The Gender Impact of Social Security Reform compares the gendered outcomes of social security systems in Chile, Argentina, and Mexico, and presents empirical findings from Eastern and Central European transition economies as well as several OECD countries. Women's positions have improved relative to men in countries where joint pensions have been required, widows who have worked can keep the joint pension in addition to their own benefit, the public benefit has been targeted toward low earners, and women now retire at the same age as men. The Gender Impact of Social Security Reform will force economists and policy makers to reexamine the design features that enable social security systems to achieve desirable gender outcomes.

Modernizing social security: Changing responsibilities and individual choice

Social security needs to be reformed to make it sustainable. We argue that it is necessary to consider not only system characteristics (such as the level and duration of benefits, insured population), but also the division of responsibilities. Social security is not solely a state matter; firms, trade unions, industrial sectors and the individual play a role as well. As social risks are to some extent endogenous, insurance ought to be taken care of at the level at which the risk can be most directly influenced in order to improve efficiency. This may partly take place within the public system, for example through risk rating. Alternatives would include shifting from collective to more individual arrangements, prominent examples being multipillar systems and savings accounts. Multipillar systems mainly imply a new division of responsibilities, taking the endogeneity of social risks and the implications of modern life cycles into account. At the same time they offer more individual choice. Savings accounts reduce moral hazard without affecting individual choice. Either way, in reforming social security a balance needs to be found between competing goals or principles: between equity and efficiency, between solidarity and freedom of choice, between the risks of moral hazard and adverse selection. This choice is difficult because social security is not only about “security”. It is an important part of the way we organize our society and embodies many of society's values.

Pension Reform and Gender Gaps in Latin America: What are the Policy Options?

Several Latin American countries have implemented structural reforms in their social security-pension systems. These reforms have modified the traditional public pay-as-you-go defined benefit (PAYG-DB) schemes, introducing multipillar systems where fully funded defined contribution (FF-DC) schemes play an important role. Gender gaps in coverage and benefits under PAGY-DB and FF-DC schemes have been one of the policy issues missing in most of the reforms, in part because it has been certainly underresearched in the literature. This paper studies the sources of pension gender gaps and provides the pros and cons of a set of policy options that may contribute to overcoming the gaps found in both schemes. These policies are divided on the one hand, into specific policies that directly affect the determination of pension benefits by modifying formula design or eligibility conditions and, on the other hand, policies that indirectly affect the level of benefits and the likelihood of being entitled to them by changing incentives in labor market conditions.

On Intergenerational Risk Sharing within Social Security Schemes

One of the main reasons to include pay-as-you-go (PAYG) schemes in multi-pillared systems is that they may entail beneficial risk-sharing and diversification features. However, depending on the pension formula these features vary significantly for different types of PAYG schemes. We derive individually most-preferred PAYG rules (represented by a risk-sharing parameter) for young and old members of a society. These preferences depend among others on the correlation between the risks of PAYG scheme and funded schemes and on the trust in the durability of the rule. We find that the generations' interests with respect to the optimal PAYG policy need not necessarily clash, in particular not if future economic conditions are expected to be similar to today's. We discuss the implications of these findings for the political economy of multi-pillar systems.

Exploring the future for pensions pillarisation

The pensions pillarisation agenda envisages a reduction in the role of social insurance while simultaneously advocating the parallel expansion of fully funded private sector, occupational and personal retirement contingencies. Widespread perception of looming state failure in the field of pensions delivery highlights the inherent limitations of current pension delivery arrangements. However, moves to de-emphasise the provision afforded by, predominantly, monopillar state-mandated pension systems by expanding private privision represent short-term palliative responses to deep rooted structural and demographic problems. Multipillar systems appear no more capable of guaranteeing system funding in the face of demographic ageing and structural unemployment than existing monopillar systems. Moreover, a diminished role for social insurance will leave the low paid and unemployed significantly more vulnerable in old age. Consequently, this paper argues for a pension reform agenda which, in terms of levels of income substitution, will secure an adequate social insurance element into the future.