According to the MAPFRE Economics Pension systems from a global perspective report
Spain is under a particularly high level of pressure due to changing demographics and an asset shortage in retirement plans
The COVID-19 pandemic will not impact the sustained global increase in longevity
One of our societies’ greatest challenges over the next few decades will be the future of pensions. Governments therefore need to open up a space for dialog on the implementation of measures that will give them viability. These are some of the conclusions drawn from the Pension systems from a global perspective report, presented by MAPFRE Economics and edited by Fundación MAPFRE.
The study, which features an in-depth analysis of the pension systems of 11 countries, states that “it is imperative that pension systems be reformed as soon as possible so that they will be provided with sustainability and stability in the long-term (and, consequently, greater equity). There must also be a better balance between pension system pillars in order to limit and mitigate the impact should risks inherent in their operation materialize.”
MAPFRE Economics also prepares an “Indicator of pressure on pension systems” based on adequacy and sustainability parameters of pension systems in 45 countries.
Results of this analysis show that the regions with the greatest pressure are Western Europe, along with Japan and South Korea. The systems of Eastern Europe and Greece are under greatest pressure, followed by countries like Italy, France, Portugal and Spain where there are high levels of pressure for reform. In the latter countries, this is mainly due to changing demographics and other indicators related to sustainability, coupled with an asset shortage in retirement plans.
In Latin America, the systems in Chile and Mexico show a moderate level of pressure, arising from pension inadequacy indicators for low and medium incomes. In Brazil, pressure for reform is somewhat higher (although moderate, partly because some reform has been underway in recent years), and stems from factors related to budgetary and financial sustainability, as well as from insufficient assets in retirement plans.
The demographic factor is based on drastic declines in fertility rates along with the widespread decrease in mortality rates and the positive effect of this on life expectancy in the population reaching retirement age. According to the report, it does not seem that the current pandemic will have “enough of an impact to alter the main conclusion regarding the sustained increase in longevity.”
Balance between pillars
Every pension system across the globe is facing the pressures of demographic, economic and financial risks. According to the MAPFRE Economics study, the reform path with the greatest potential for sustainability and stability in the medium- and long-term involves “creating a better balance between the different pillars, as a way to redistribute the risks to which these systems are exposed and, ultimately, to better absorb the impact should said risks materialize.”
From an instrumental point of view, the objective of creating a better risk balance can be summarized in the following general principles:
- Maintenance and strengthening of a basic social support scheme (Pillar 0), i.e. minimum non-contribution-based social support aimed at those workers with incomplete careers who are therefore unable to qualify for a contribution-based pension.
- Rationalization of a first contribution-based pillar that combines inter-generational solidarity with individual savings, thus bringing the benefits of the system into line with the individual contributions to that system. In this process, measures such as adjusting the retirement age (shown to be the measure likeliest to achieve this objective), together with adjusting contribution rates, are the two essential tools.
- The generation of incentives for companies to create and manage (directly or indirectly through professional fund managers) contribution-based supplementary pension plans (especially defined-contribution plans) to supplement Pillar 1 contribution-based pensions.
- Application of incentives for medium- and long-term voluntary individual saving, which workers can channel through professional managers with financial products designed to generate an income during retirement, thus supplementing the pensions from Pillars 1 and 2.
The full report is available, currently in Spanish, here