Saturday, September 17, 2016

Lets examine some public pension systems to see how they measure up globally

For ten years OECD (The Organization for Economic Cooperation and Development (OECD) is a unique forum where the governments of 34 democracies with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.) has reviewed and studied and scrutinized member and G20 countries’ pension systems and policies on pensions; ten years of assessing and predicting workers’ pension entitlements, and ten years of recommending reforms that lead to more financially sustainable pay-as-you-go pensions and also respond to citizens’ need for stable and adequate incomes in old age.

The most visible progress has been made in raising official pension ages. Many countries have been moving this key parameter beyond the mark of 65 years. As highlighted in previous editions of Pensions at a Glance, 67 has indeed become the new 65, and several countries are going even further towards ages closer to 70. Across OECD countries, the average retirement age will increase to 65.5 by 2060 from 64 in 2014 on the basis of legislation as of 2015.

The share of individuals aged 65 and above will increase from 8% of the total world population in 2015 to almost 18% by 2050 (Figure 1.1), and from 16% to 27% in the OECD. In the OECD, the share of the population older than 75 years will be similar in 2050 to the share older than 65 years’ today

Employees stay the longest in the labour market in Iceland, Japan, Korea and Mexico. In Belgium and France, men retire the earliest, while it’s women who do so in Poland and Slovenia.

Future net-replacement rates from mandatory pensions for a full-career, average-wage worker are an average of 63 per cent in OECD countries. They range from 27 per cent in Mexico to 111 per cent in Turkey.

Most OECD countries have been active in changing their pension system since the last publication of Pensions at a Glance (OECD, 2013). Efforts were mostly driven by the widespread need for fiscal consolidation, and a majority of countries indeed implemented reforms to improve the financial sustainability of their pension systems.

Some countries have done so while maintaining or improving retirement income adequacy, at least for some population groups.

Improving financial sustainability

  •    The most popular measure was to strengthen the incentives to work by increasing the minimum retirement age and/or the main retirement age, thereby enlarging the contribution base while preserving adequacy for those who are able to work longer.
  •    Almost no country resorted to direct nominal benefit cuts. When benefits were directly reduced, this only happened by switching to a narrower targeting, or by introducing adjustments in the initial pension benefit for new retirees.
  •    A much larger number of countries changed the indexation of pension benefits to less generous uprating mechanisms.
  •    Many countries raised revenues by increasing taxes or contribution rates in defined-benefit systems.
  •    Measures to curb pension administration costs were quite common.
Increasing retirement-income adequacy
·       Several countries have taken measures to increase the coverage of voluntary private pension schemes. Some countries awarded retroactive pension credits or reduced the impact of missing years of contributions on pension levels.

·       In some defined-contribution schemes, contribution rates have been increased, while some countries chose to reduce the effective taxation of pensioners’ income.

·       In a number of countries management costs have been lowered and several improvements were made to the security of pension investments

One trend that is certain, however, is the shift from defined-benefit schemes, where the employer shoulders the risk, to defined contribution schemes, where the risk lies with the individual worker. This trend, well entrenched in occupational pension schemes, is also observed in public pension schemes with much closer links between workers’ contributions and their pension benefits, and benefit formulae which more and more often take into account increases in life expectancy.

So, how does Canada measure up against other industrialized countries?


How does it work? Canada’s public pension system offers a flat-rate benefit that can be topped up with an income-tested benefit (the guaranteed income supplement) and earnings-related public schemes (the Canada Pension Plan and the Quebec Pension Plan).

Age of eligibility: Under the former Conservative government, the age of eligibility for the basic OAS pension was to gradually increase to age 67, starting in April 2023, but Prime Minister Justin Trudeau’s first federal budget confirmed it would restore it to 65. For the Canada Pension Plan, the normal eligibility age is 65, but people can take an early pension from age 60 or a late one up to age 70.

Benefit calculation: Based on April to June 2016 monthly rates, the maximum annual OAS pension benefit for an individual is $6,846.24. The maximum annual GIS benefit is currently $9,283.20 (the amount will increase on July 1 to $10,230.20). So a single senior with no income outside of OAS and GIS benefits (such as CPP) would receive a combined $16,129.44 under the current amounts.

The maximum CPP payment amount for 2016 is $13,110. According to Finance Canada, it’s possible for an individual with the maximum CPP benefit to qualify for GIS payments as well. A senior could receive OAS, GIS and CPP benefits, but it’s not possible to receive the maximum of each of them since higher CPP payments directly reduce GIS amounts.

How does it work? Australia’s public retirement system involves a means-tested age pension funded through general taxation.

Age of eligibility: The pension is payable from age 65. From July 1, 2017, the pension age will increase by six months every two years until it reaches 67 by by July 1, 2023.

Benefit calculation: In March 2014, the maximum single rate of pension was equal to an annual entitlement of 21,570 Australian dollars (currently equal to $20,316.63).


How does it work? Before April 6, 2016, Britain’s public pension system had two tiers: a flat-rate basic pension and an earnings-related one. The new state pension introduces a flat-rate pension based only on national insurance contributions.

Age of eligibility: The state pension age is currently 65 for men and 63 for women. The pension age for women is gradually rising to 65 by November 2018. The government has also legislated increases in the state pension age to 66 by October 2020 and to 67 between 2026 and 2028.

Benefit calculation: The full rate for the new state pension is 155.65 pounds per week, which works out to about 8,000 pounds a year ($14,585.51). The additional earnings-related pension, which can reach almost 200 pounds a week and depends on national insurance contributions, is still available for people who reached the state pension age before April 6, 2016.


How does it work? China has a basic public pension.

Age of eligibility: The normal pension age is 60 for all men, 50 for blue-collar women and 55 for white-collar women. The government has said it will begin to gradually increase the normal pension age in 2017.

Benefit calculation: The basic pension pays one per cent of the average of the indexed individual wage and the provincewide average earnings for each year of coverage, subject to a minimum of 15 years of contributions. The program includes indexing according to a mix of wages and prices, which has been about 10 per cent in recent years.


How does it work? France has a basic pension that can be topped up by a means-tested supplement.

Age of eligibility: Under the country’s 2010 pension reforms, the minimum legal retirement age will increase to 62 from 60 by 2017 for people born in 1955 and onward. The age of entitlement to the full-rate pension will rise to 67 from 65 between 2016 and 2023.

Benefit calculation: The minimum full-rate pension is currently 629.63 euros a month or 7,555.56 euros ($10,851.08) per year.


How does it work? The statutory public pension system has a single tier and is an earnings-related system. The pension calculation is based on pension points. People can claim additional means-tested benefits from social assistance.

Age of eligibility: The current old-age pension is payable from age 65 and three months with at least five years of contributions. The statutory retirement age will gradually increase to 67 until 2031 for those born in 1964 or later.

Benefit calculation: A year’s contribution at the average earnings of contributors earns one pension point. The relevant average earning is approximately identical to the national accounts average earnings, which was 34,857 euros in 2014. At retirement, the pension points are summed up and then multiplied by a pension-point value, which was 337.68 euros in 2014. So, an individual who worked for 40 years and retired in 2014 could expect to receive 13,507.20 euros annually ($19,399.34).


How does it work? The public pension system has two tiers: a basic, flat-rate scheme and an earnings-related plan.

Age of eligibility: The pension age for the basic scheme is 65, with a minimum of 25 years of contributions. From April 1, 2017, it will require a minimum of 10 years of contributions. The earnings-related pension age is increasing to 65 from 60 between 2013 and 2025 for men and between 2018 and 2030 for women.

Benefit calculation: The full annual basic pension benefit in 2016 is equal to 780,100 yen ($9,283.64). The earnings-related pension benefit depends on both remuneration and the length of contributions.


How does it work? The publicly provided pension benefit in the United States, known as social security, has a progressive benefit formula. There’s also a means-tested top-up payment available for low-income pensioners.

Age of eligibility: The pension age (called the normal retirement age) was 66 in 2014 and will increase to 67 by 2022. A person can take a reduced retirement benefit as early as age 62.

Benefit calculation: The earnings-related pension benefit formula is progressive, with portions of relevant monthly earnings attracting a different replacement rate. For instance, in 2016, the band of monthly earnings between US$856 and US$5,1517 attracts a replacement rate of 32 per cent. According to the Social Security Administration, in 2015, the average monthly benefit was US$1,336 a month or US$16,032 ($20,404.82) annually.

There’s also a means-tested benefit for the elderly, known as supplemental security income. In 2016, individuals aged 65 years or older without an eligible spouse can receive a monthly payment of up to US$733, or US$8,796 ($11,194.30) annually.

The information in this post was taken from Pensions at a Glance and a story by Jennifer Paterson on How does Canada measure up against other countries. Published in BenefitsCanada

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