Pension reform in OECD countries

Many of the problems faced by countries in considering how to reform their pension systems are similar: ageing populations, expensive state provision and difficulties in regulating and taxing private provision. There are therefore benefits in pooling the experiences of countries that have different pension systems and have enacted different reforms.

A new book, edited by Richard Disney and Paul Johnson, launched today Friday 19th October at a conference at the Institute for Fiscal Studies looks at pension systems in nine major OECD countries.¹ This work focuses on the incomes that pensioners actually receive in each of these countries, and the future cost and sustainability of the pension systems that they currently have in place. The main findings of the work are:

• Pension systems vary significantly. The French and German social insurance systems have much in common with their continental European counterparts but are completely different from the Australian system where the state provides just the basic minimum. The UK, US, Canada and Japan operate systems at various points between these two models.
• Despite these differences, countries are introducing surprisingly similar sets of reforms. Many countries have raised pension ages, reduced the generosity of the way in which pensions are indexed and cut back on earnings-related schemes.
• There has been an increase in the private sector coverage in all countries except for New Zealand.
• Average levels of pensioner income are not greatly divergent between these countries. The main exception is Australia which had a lower average level of income due to its reliance on means-tested benefits and lump-sum pay-outs from pension funds.
• There are significant differences in the distribution of income among pensioners. Countries such as France, Germany and Italy with extensive social insurance systems have higher levels of pensioner inequality due to the fact that the social security system is closely related to an individual's previous wages.

Professor Richard Disney, an editor of the book, said "the country-specific analyses show that future problems with spending levels are more a function of the pension system than they are of population ageing per se. While the private sector can play a role, those countries with minimal state systems combined with greater reliance on the private sector do tend to end up with more pensioners with incomes below average earnings".

There were also a number of lessons that could be learned about the reform process. Professor Richard Disney went on to comment that, "the private sector needs a conducive framework to operate in, but mistakes in the other direction have also been made in the past. For example the UK experience with personal pensions demonstrates that overgenerous incentives can lead to massive 'opting out' of state provision with little budgetary gain for the government."

Ends

Notes to editors

1. The countries considered are: Australia, Canada, France, Germany, Italy, the Netherlands, New Zealand, the United Kingdom and the United States.
2. "Pension Systems and Retirement Incomes across OECD Countries", edited by Richard Disney and Paul Johnson and published by Edward Elgar will be launched at a conference on the 19th October at 11am at the IFS.
3. Copies of the publication are available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, telephone 020 7291 4800 or e-mail [email protected], price £65 (£50 to IFS members).
4. The research was funded by the Institute of Chartered Accountants of Australia (ICAA). The project was originally discussed at a conference at the IFS in March 1998, which was funded by the National Association of Pension Funds (NAPF).