International Trends in Pension Provision

Summary

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This paper considers international trends in pension arrangements, starting with lessons from economic theory. The analysis includes recent developments in the economics of information and behavioural economics, developments which call into question conventional arguments in favour of voluntarism and free competition. Section 3 of the paper considers why pension systems are developing the way they are - largely a response to a series of long-term trends. In light of the discussion in Sections 2 and 3, Section 4 of the paper describes pension systems in a range of countries, and illustrates the wide range of options available to a developed country. Section 5 reflects briefly on accounting standards. The paper offers a number of key messages. Pension systems have multiple objectives. Second, and, in part, a consequence, there is no single best pension system. Third, policy design is not enough - the design of pension systems must be compatible with a country's capacity to implement the design effectively.

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International Trends in Pension Provision

1. Introduction

A survey of pension systems internationally risks becoming a long narrative that leaves the reader unclear about why the paper was worth reading. To avoid that fate, I shall start with the 'So what?' question - why is an international survey useful? For the purposes of this conference I take the answer to be:

* that accounting standards have important effects on the position of firms and, as a consequence, on the welfare of workers and pensioners;

* that with increasing labour mobility, accounting standards need to apply internationally and, in order to do so, need to be applicable to the wide range of pension systems that exist across countries;

* that revision of accounting standards needs to be forward looking, so that the survey should focus less on a static snapshot of current systems than on directions of change.1

As backdrop, it is important to understand why the wide range of different systems is largely an appropriate outcome, not a malign accident. Thus the second part of the paper sets out lessons from economic theory. The third part looks at directions of change and discusses why pension systems are changing in those directions. The fourth part discusses outcomes, looking at a selection of systems in different countries. The paper concludes with an epilogue on accounting, though I am not an accounting expert, so discussion is brief.

2. Lessons from economic theory

This section suggests some conclusions from economic theory: pension systems have multiple objectives; what matters is output; imperfect consumer information and decision-making are pervasive; and pension schemes face large risks. The section concludes with an important adjunct to the theoretical discussion - the argument that implementation matters.

2.1. Pension systems have multiple objectives

From an individual viewpoint, income security in old age requires two types of instruments: a mechanism for consumption smoothing, and a means of insurance.

Consumption smoothing

People are not interested in income per se, but in the consumption of goods and services - food, clothing, bus rides, medical care, tickets to football games, etc. People seek to maximise their wellbeing not at a single point in time, but over time. Someone who saves does so not because extra consumption today has no value, but because he values extra consumption in the future more highly. Most people hope to live long enough to be able to retire, so a central purpose of retirement pensions is consumption smoothing, whereby people seek to transfer consumption from their productive middle years to their retired years.2

Insurance

In a world of certainty, individuals save during working life to finance their retirement. However, people generally do not know how long they are going to live. Thus a pension based on individual savings faces the risk that the person will outlive those savings. Though any one person does not know how long he is going to live, the life expectancy of...

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