04 June 2008

OECD warns EU against pensions ‘complacency’

The OECD warned the European Parliament there should be no “complacency” on the future of pensions, as at least four countries still need to make “major reform efforts”. In a presentation to the European Parliament's employment committee’s hearing on social security and pensions, Asghar Zaidi, a representative from the OECD, told MEPs over the next 50 years public spending on pensions is expected to decline in Estonia, Latvia and Poland.

He said these decreases, between 2004 and 2050, as well as some small increases in pension expenditure in Lithuania and Slovakia, were partly the result of pension reforms over the last decade where part of the old-age public pension system was switched into privately-funded schemes.

However, he warned Austria is “one of the only EU15 countries” that has experienced a decline in public pension spending, in the period from 2004, which the OECD attributes to the “parametric reforms” in 2000.

And although pension expenditure in Italy and Sweden is expected to remain unchanged – as the post-reform public schemes are defined contribution – Zaidi claimed Portugal, Spain and Luxembourg would face the largest rise in pension spending within the EU15.

The briefing note issued by Zaidi showed between 2004-2050 pension expenditure in Portugal is expected to increase to 9.7% of GDP, while Luxembourg is estimated to spend 7.4% and Spain 7.1%.

The OECD pointed out to the Committee that “there have been no significant pension reforms in Luxembourg and Spain since 1990, despite the fact these two countries belonged to the group of countries with the highest pension spending as early as in 1990”.

In addition, the research showed relatively larger increases are also projected for Belgium and Ireland, 5.1% and 6.4% of GDP respectively, although the largest challenges in the whole of the EU will be faced by four of the 10 new member states.

Zaidi revealed in the period to 2050 there will be a projected increase on pension spending of 5.6% of GDP for the Czech Republic, 6.7% in Hungary, 7.3% in Slovenia and 12.9% in Cyprus, with the OECD warning these four countries require “some form of pension reforms to move away from their predominantly pay-as-you-go pension schemes”.

The briefing note did highlight, however, Slovenia’s decision to fully index pension benefits to net wage growth from 2006 as well as Hungary’s improvements to the widow’s pension level and a gradual introduction of 13th month pension are “important factors in the projected increase in public pension spending”.

As a result, Zaidi warned in his briefing “despite the many, sometimes radical, pension reforms in many countries there is no reason for complacency: the pension-reform agenda is far from finished”.

In particular, he warned some countries still need to make “major reform efforts”, as for example, four of the countries with the highest pension spending in 1990 – Greece, Luxembourg, Belgium and Spain – “saw little or no change in their pension systems over the same period”.

That said, Zaidi also warned the Committee of further challenges to the future financing of pensions, including the sometimes “painfully slow” implementation of reforms, and the need to increase retirement ages in line with longevity.

In addition, the OECD said all governments need to “show greater commitments towards extending coverage of private pension schemes”, while at the same time ensuring old-age poverty does not reassert itself as an issue in the future.

© IPE International Publishers Ltd.