NBER Reporter: Spring 2000

Coping with the Pension Crisis -- Where Does Europe Stand?

The NBER and the Kiel Institute of World Economics

The NBER and the Kiel Institute of World Economics sponsored a joint conference on "Coping with the Pension Crisis -- Where Does Europe Stand?" in Berlin on March 20 and 21. Martin Feldstein, NBER and Harvard University, and Horst Siebert, Kiel Institute of World Economics, organized the program. The purpose of this project is to examine the different approaches to social security reform in Europe. Ten country studies and three broader analyses were presented at the conference.

The papers presented show that all European countries are experiencing rapidly aging populations that will cause sharp increases in the cost of retirement income over the next several decades. Britain and the Netherlands have already shifted to pension systems that are primarily investment-based rather than pay-as-you-go; therefore, they do not face large increases in taxes in the years ahead. Several other countries are moving toward mixed systems that will use both a pay-as-you-go and an investment-based approach. The countries with this type of approach that were analyzed as part of the NBER-Kiel project include Sweden, Finland, Poland, Hungary, and Romania. Italy has adopted an unfunded, defined contribution system with a small step toward greater reliance on investment-based accounts. France and Germany have made few changes and face very large tax increases or benefit cuts. A common feature of the European reforms of social security over the past 20 years has been substantial reductions in benefits.
The two-day agenda was:

Jonathan Gruber, NBER and MIT, and David A. Wise, NBER and Harvard University, "Different Approaches to Pension Reform from an Economic Point of View"
Discussant: Herbert Hax, Cologne University

Alain Jousten and Pierre Pestieau, Universite de Liege, "Labor Mobility, Redistribution, and Pension Reform in Europe"
Discussant: Michael Burda, Humboldt University of Berlin

Assar C. E. Lindbeck, Stockholm University, "The Challenge of a Changing Socioeconomic Environment to Social Security"
(No discussant for this paper.)

Bert Rürup, Institut fur Volkswirtschaftslehre, "The Future of the German Pension System: Stabilization of Contributions by a Mandatory Savings Plan"
Discussant: Axel H. Boersch-Supan, NBER and University of Mannheim

Didier Blanchet, INSEE, and Florence Legros, University of Paris IX, "France: The Difficult Path to a Consensual Reform"
Discussant: Martine Durand, OECD

Daniele Franco, Banca d'Italia, "Italy: A Never Ending Pension Reform"
Discussant: Franco Peracchi, Tor Vergata University

Jukka Lassila and Tarmo Valkonen, ETLA, "Prefunding in a Defined Benefit Pension System -- The Finnish Case"
Discussant: Reijo Vanne, Central Pension Security Institute

Jeroen J. M. Kremers, Finance Ministry of the Netherlands, "Pension Reform: Issues in the Netherlands"
Discussant: Lans Bovenberg, Tilburg University

Edward Palmer, National Social Insurance Board, Stockholm, "Swedish Pension Reform -- How Did It Evolve and What Does It Mean for the Future?"
Discussant: Laurence J. Kotlikoff, NBER and Boston University

David Blake, University of London, "The United Kingdom: Examining the Switch from Low Public Pensions to High-Cost Private Pensions"
Discussant: Andrew A. Samwick, NBER and Dartmouth College

Jerzy Hausner, Cracow University of Economics, "Poland: Security through Diversity"
Discussant: John F. McHale, Harvard University

Roberto Rocha and Dimitri Vittas, World Bank, Hungary, "The Hungarian Pension Reform: A Preliminary Assessment"
Discussant: John F. McHale

Georges de Ménil, Pro Democratia Foundation, Bucharest, Eytan Sheshinski, Hebrew University, Jerusalem, "Romania's Pension System: From Crisis to Reform"
Discussant: John F. McHale

Panel Discussion: Where Will Europe Go?
Martin Feldstein; Assar C. E. Lindbeck; Horst Siebert; and Ignazio Visco of the OECD

In their overview paper, Gruber and Wise explain the various problems that social security systems currently face. They then describe and comment on different approaches to addressing these problems, from incremental measures to a complete switch towards a prefunded system

Jousten and Pestieau discuss the main characteristics of mandatory pension systems in Europe and the implications of these systems for increasing factor mobility. Increased mobility of labor, the authors suggest, leads to a decrease in the extent of income redistribution, even if the mobility is limited to some particular subgroups in the working population.

Lindbeck analyzes how different types of pension systems transmit socioeconomic shocks to individuals and how the incentive structures of these pension systems induce socioeconomic changes. The relationship between socioeconomic development and the pension system depends not only on whether pensions are fully funded but also on other, less fundamental characteristics. Lindbeck finds that combining pay-as-you-go and funded systems balances the advantages and disadvantages of each.

Rürup discusses how introducing a mandatory supplementary funded pillar to Germany's existing pay-as-you-go pension system could help to maintain the system's financial stability and provide for Germans' old-age security.

Blanchet outlines the French debate over pension reform that took place during the 1990s and the reforms implemented in that period. He focuses on the role that savings -- be they from life insurance, employee savings schemes, or pension funds -- play in preparing for retirement.

In reviewing the Italian pension system, Franco finds that some reform is necessary to ensure the system's long-term fiscal sustainability. The reforms implemented so far, while not without impact from the fiscal perspective, have been incomplete and have not broken the typical pattern of Italian policymaking. The lengthy reform process has reflected the demands of special interest groups, has generated uncertainty, and has diminished the gains in economic efficiency.

Lassila and Valkonen describe the Finnish pension system, which consists of both national minimum pensions and earnings-related pensions. The earnings-related pensions are partly funded, while the minimum pensions are financed entirely on a pay-as-you-go basis. In the future, the authors expect small changes within the system rather than fundamental reforms of the whole system. Compared to other international models, the financial position of the Finnish pension system appears healthy.

Kremers argues that the Dutch pension system is perhaps the most funded collective pension system in the world: it combines a basic pension with a compulsory and fully funded second pillar. Because of that second pillar, the system is relatively sound financially. Thus, any reforms of the earnings-related system might be aimed at giving more freedom for individual choices and improving the system's efficiency.

Palmer describes the main features of the Swedish pension reform of 1994, which may be seen as a paradigm shift in thinking about the provision of public pensions. Sweden now has a two-pillar public pension system: a pay-as-you-go pension as the first pillar and a funded, privately managed second pillar. Both components of the pension scheme are based on individual lifetime accounts.

The United Kingdom is one of the few European countries not facing a serious pension crisis. This is because of the small size of its public pension system, the long-standing funded private pensions sector, comparatively favorable demographic development, and the government measures taken since the early 1980s to prevent a pension crisis from developing. However, Blake identifies several potential problems with respect to the provision of pensions by the private sector.

Hausner explores the reasons behind the financial insolvency of the Polish pension system and describes the nature of the newly introduced multipillar system. He finds, however, that Poland's pension reform program remains incomplete: the major problem currently lies with the organizational inefficiency of the system's public administration in general and with the Social Insurance Institution in particular.

Rocha and Vittas review the main components and objectives of the Hungarian pension reform and preliminarily assess the first two years of its implementation. They find that the overall reforms can be called a success, although substantial shortcomings still exist and further adjustments probably will be required.

De Ménil and Sheshinski discuss Romania's prereform situation and the architecture of its new public and private pension system. The authors evaluate budgetary implications and economic effects and conclude that, in a country lagging behind in economic reforms and consisting of relatively poorly developed financial markets, the success and safety of the system depend critically on the supervisory body's authority, effectiveness, and independence from political influence.

These papers and their discussion will be published as an NBER volume and will also soon be available at Books in Progress.

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