EUROPE - A gradual 100% shift to a funded European pension system is essential, according to economists in the Directorate-General for Economic and Financial Affairs (ECFIN) of the European Commission.
Pay-As-You-Go (PAYG) pensions can ultimately only continue to operate in an environment of growing populations, say Kieran McMorrow and Werner Roeger, in new research titled ‘EU Pension Reform - An Overview Of The Debate And An Empirical Assessment Of The Main Policy Reform Options’.
And on the basis of central population projections from Eurostat, the Commission’s statistical office, these conditions will not hold over the coming decades, with in fact the situation actually worsening in terms of growing dependency burdens.
Even if the demographic projections turn out better than expected, a system of retirement income provision based on funding is on balance economically superior to that of a PAYG system - the study suggests that a shift from PAYG to funding could yield an annual average growth rate gain of 0.1% or possibly 0.2%, each year over the next 50 years with these annual gains being significantly higher at over 0.5% if pension reform is accompanied by announced labour market reforms plus an increase in the effective retirement age.
The authors say the new systems should be two pillared, split between the public and private sectors, with member states free to choose the respective shares of each pillar on the basis of an appropriate country-specific mixture of economic, political and institutional factors.
The public pillar would essentially replace the old PAYG system and would share many of the latter's features - namely be a defined benefit, compulsory savings system with low administration costs. The essential differences with the old PAYG system would be that the new system would be individualised, more transparent and with a clear actuarial basis linking contributions to benefits.
The study adds: “The actual management of the pension fund assets may be outsourced to specialised private sector pension operators with this outsourcing done on the basis of an open, competitive, tendering process. The private pillar should be a voluntary, defined contribution, system with the specific design features of this pillar being crucial to its ultimate success, such as the regulatory and competitive framework, normal prudential requirements and the avoidance of excessive administration costs.”
By Luke Clancy
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