NBER Reporter: Spring 2000
Coping with the Pension Crisis -- Where Does Europe Stand?The NBER and the Kiel Institute of World Economics
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.