PAYG system may aid labour market - conference

GLOBAL - Substitution of personal pension plans for PAYG systems has a positive effect on employment, net wages, unemployment rates and the labour participation rate, delegates at an international pensions conference have been told.

A change in a country's pension system has an impact on its labour market, Augusto Iglesias, of Chilean consultancy PrimAmerica, told a conference on the role of funded systems in solving the pension problem, hosted by the international Federation of Pension Fund Administrators (FIAP) and the Bulgarian Association of Supplementary Pension Security Companies (BASPSC) in the Bulgarian port of Varna.

"Pension reform could lead to lower contribution rates net of fees than a PAYG system," Iglesias said.

"The return of PAYG systems was linked to the long-term growth of the economy, and even the per capital growth of the economy, so returns of 2-3% for developed countries and 3-4% for emerging economies. However, pension reform could lead to returns of 5-6% for developed economies and 7-8% for developing economies."

In an address aimed at policymakers, Iglesias added pension rules in many PAYG systems penalise employees for working after the statutory retirement age and often generate incentives for early retirement by capping pensions .

This tends to mean no further pension rights accumulate after a certain number of years and pensions are based on the final or best years' earnings, thereby precipitating a decision to retire after a peak is reached, according to Iglesias.

In addition, some pension systems were not compatible with continued paid work.

"But it pays more to postpone retirement in a DC pension system than a DB PAYG system, and later retirement should increase labour market participation," he said.

That said, expectations of increased coverage following pension reform have not been met, he added.

"Coverage of a pension system has not increased in countries that have made reforms," Iglesias said. "The coverage of contributory pension programmes depends mainly on the distribution of labour between formal and informal sectors and on unemployment rates," he continued.

Anita Schwarz, lead economist, Europe and Central Asia at the World Bank, earlier told the conference while the conventional wisdom is PAYG systems enable governments to pursue intergenerational and intergenerational wealth redistribution policies, this was often not the outcome.

"As a population ages, contribution rates need to rise, benefits need to fall and retirement ages need to increase to keep the system financially sustainable," she said. "But, as a result, the benefits received by earlier generations relative to what they paid is much higher than is affordable for later generations.

"For example, if there are 10 workers per elderly person each retiree can get 10 times the contribution, but if there are only two workers per elderly person, each retiree can only get twice the contribution," added Schwarz.

The conference was also told political consensus around a pension reform was an asset.

Agnieszka Chion-Dominczak, adviser to Poland's minister or regional development, suggested a political commitment to pension reform was crucial. "The government must have a single, well-communicated proposal, and cross-party consensus is important because reform will take place across several governments."

Hassan Ademov, chairman of Bulgaria's parliamentary labour and social politics committee, agreed, stressing once the process was started it would be a mistake to go back.

He said Bulgaria adopted the World Bank's pillar reform model at a time when macroeconomic conditions were favourable and ambitions to join the EU gave the reform process additional impetus.

He added, however, there was dissatisfaction with the level of the state PAYG pension.

"We are trying to introduce the so-called ‘Swiss rule', which compensates for inflation with a combination indexing to the cost of living and average earnings," said Ademov.

"But we still haven't found a way to introduce it that will meet the expectations of the Bulgarian people."