Download Pension reform (cont.)

Inspection générale de la sécurité sociale (IGSS)
Reforming the LU pension system
ELSA
May, 2nd 2012
1
Context
Ageing society: life expectancy at age 60 increases by over 5 years over
the period 2010-2060
35,0
30,0
25,0
20,0
15,0
2056
2051
2046
2041
2036
2031
2026
2021
2016
2011
2006
2001
1996
1991
1986
1981
1976
1971
10,0
Life expectancy at 60 - males, EUROSTAT
2
Context (cont.)
«Luxembourg sucess story»: over 4% of economic growth on average
over the period 1980-2010
40000
22
non resid
35000
21
resid-non lux
30000
20
resid-lux
25000
19
20000
18
15000
17
10000
New entrants to the general pension scheme, IGSS
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
15
1964
0
1961
16
1958
5000
Average entry age of lux. new entrants - males, IGSS
3
Context (cont.)
Pension level
gross
replacement rate
Belgium
France
Germany
Luxembourg
42
49
42
87
gross pension
wealth
7
9
8
21
Pensions at a glance, OECD
4
Past evolutions











December 2005: IGSS long term projections on general pension scheme
April 2006: Tripartite coordination committee - working group on pensions
April 2009: IGSS report on reform proposals presented to parliament
July 2009: pension reform included in the government program
January 2010: approval of general orientations by government
March 2010: endorsement of global concept by parliament
June 2010: public debate on pensions in parliament
March 2011: discussion of proposals in parliament
April 2011: presentation of reform to social partners
January 2012: agreement by the government on bill
....
5
Overview of the system
Old age schemes
general pension scheme for the private sector
special pension schemes for the public sector
supplementary pension schemes for the private sector
private pension plans
social assistance
Risks covered by pension schemes
disability, early old age, old age and survivor
6
Overview of the system (cont.)
Pension formula (general scheme + new special schemes)
P = P1 + P2 + P3 + P4, where
P1 = min[40,QY] / 40 * 0.235 * SMI (flat part)
P2 = 0.0185 * I (proportional part)
P3 = ( max[0,age - 55] + max[0,CY - 38] ) * 0.0001 * I (proportional increases)
P4 = min[40,QY] / 40 * 0.025 * SMI (end of year allowance)
I: total income over the career (at 1984 wage level)
SMI: social minimum income (at 1984 wage level)
CY: contributory years
NY: non-contributory years
QY: qualifying years (CY + NY)
7
Overview of the system (cont.)
Retirement age
57 if CY >= 40
60 if (CY+NY) >= 40
65 if CY > 10
Financing (general scheme)
8% employer/employee/central government
reserve fund > 1.5 times annual expenditures over a fixed 7 period
Indexation of pensions (to prices)
100% to price evolution (CPI)
8
Overview of the system (cont.)
Pension adjustment (to wages)
“Every two years, the Government considers whether to proceed or not to revise the
adjustment factor by law, given the resources and the evolution of the average level
of wages and salaries.” (article 225, paragraph 4, Code of social security CSS)
retirement
pension
wage
adjustment
coefficient
adjustment
factor
wage base 1984
pension base 1984
age
20
(1984)
60
80
9
Overview of the system (cont.)
System parameters (general scheme)
pensions per 100
contributors
required
contribution rate
1980
48.6
22.8
reserve fund as
multiples of annual
scheme
expenditure
2.0
1990
47.0
22.7
2.6
2000
43.2
20.8
2.9
2010
39.9
20.8
3.8
Rapport général sur la sécurité sociale, IGSS
10
Expected future evolution of pension system
Reserve fund (general scheme, %of GDP)
100%
50%
0%
2% f ull
-50%
3% f ull
-100%
-150%
-200%
-250%
-300%
-350%
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
-400%
2% scenario, AWG – 3% scenario, IGSS
Pension expenditures (general scheme and special schemes, %of GDP)
30%
25%
2% f ull
20%
3% f ull
15%
10%
5%
2% scenario, AWG – 3% scenario, IGSS
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
0%
11
Policies under the actual legislation
Pension benefits (article 225 CSS): expenditures (% of GDP) and gross replacement rate
30%
100%
90%
25%
80%
2% f ull
earnings
related
(P2+P3)
20%
2% half
70%
60%
50%
15%
f lat part
(P1)
40%
30%
10%
20%
5%
10%
2052 half
adj.
2052 f ull
adj.
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2% scenario, AWG
2012
0%
0%
Gross concept, OECD methodology
12
Policies under the actual legislation (cont.)
Contributions (article 238 CSS): required contribution rate and net replacement rate
80%
120%
70%
100%
60%
2% f ull
50%
earnings
related
(P2+P3)
2% half
80%
60%
40%
f lat part
(P1)
30%
20%
40%
20%
10%
2052 half
adj.
2052 f ull
adj.
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2% scenario, AWG
2012
0%
0%
Net concept, OECD methodology
13
Pension reform
Longevity anchored in pension formula
proportional
part (P2)
flat part
(P1)
proportional increases
(P3)
rate (%)
rate (%)
age+CY
p.p. increase
< 2013
1.850
23.500
93
0.010
2020
1.800
24.000
94
0.013
2030
1.738
24.630
96
0.017
2040
1.675
25.250
97
0.021
2050
1.613
25.880
99
0.025
> 2052
1.600
26.000
100
0.025
14
Pension reform (cont.)
Longevity anchored in pension formula (cont.): gross replacement rate
100%
90%
earnings
related
(P2+P3)
80%
70%
60%
f lat part
(P1)
50%
40%
30%
20%
10%
2052+3
ref orm
2052
ref orm
2052 f ull
adj.
0%
Gross concept, OECD methodology
15
Pension reform (cont.)
Sustainabilty mechanism
legal contribution rate fixed at the beginning of a 10 year period so that the
reserve fund > 1.5 times annual expenditure over this 10 year period
if legal contribution rate < required contribution rate, expenditures exceed
receipts and the reserve fund covers the deficit, then the mechanism comes
to play
fixed 10 year period
fixed 10 year period
28%
28%
28%
required contribution rate
legal contribution rate
26%
required contribution rate
legal contribution rate
24%
no sustainability mechanism
26%
26%
24%
sustainability mechanism
16
Pension reform (cont.)
Sustainability mechanism (cont.)
if legal contribution rate < required contribution rate, reduction/drop of
adjustment of current pensions to wage evolution
retirement
pension
readjustment
factor
wage
valorisation
coefficient
valorisation
factor
wage base 1984
pension base 1984
age
20
(1984)
60
80
if legal contribution rate < required contribution rate, drop of the end of the
year allowance (P4 in pension formula)
17
Financial impact of the reform
Expenditures (general and special schemes, % of GDP)
30%
30%
25%
25%
3% f ull
3% ref orm
2% f ull
20%
20%
2% scenario, AWG
2060
2055
2050
2045
2040
2035
2030
2025
2020
2010
2060
2055
2050
2045
0%
2040
0%
2035
5%
2030
5%
2025
10%
2020
10%
2015
15%
2010
15%
2015
2% ref orm
3% scenario, IGSS
18
Financial impact of the reform (cont.)
Required contribution rate
80%
80%
2% f ull
3% f ull
70%
70%
2% scenario, AWG
2060
2055
2050
2045
2040
2035
2030
2025
2010
0%
2060
0%
2055
10%
2050
10%
2045
20%
2040
20%
2035
30%
2030
30%
2025
40%
2020
40%
2015
50%
2010
50%
2020
3% ref orm
60%
2015
2% ref orm
60%
3% scenario, IGSS
19
Financial impact of the reform (cont.)
Reserve fund (% of GDP)
80%
80%
30%
30%
-20%
-20%
2% f ull
-70%
2% ref orm
-120%
2% scenario, AWG
3% f ull
2060
2055
2050
2045
2040
2035
2030
2025
3% ref orm
2010
-420%
2060
-420%
2055
-370%
2050
-370%
2045
-320%
2040
-320%
2035
-270%
2030
-270%
2025
-220%
2020
-220%
2015
-170%
2010
-170%
2020
-120%
2015
-70%
3% scenario, IGSS
20
Social impact
Net replacement rate: 2% and 3% economic growth (AWG and reform scenarios)
f lat part
(P1)
60%
80%
60%
20%
0%
0%
Net concept, OECD methodology
2012
20%
2052+3
ref orm
40%
2052
ref orm
40%
2052+3
ref orm
80%
100%
2052
ref orm
earnings
related
(P2+P3)
2012
f lat part
(P1)
100%
2052 f ull
adj.
earnings
related
(P2+P3)
120%
2052 f ull
adj.
120%
Net concept, OECD methodology
21
Thank you for your attention
22