OECD: pension reforms could fuel old-age poverty

2 Dec 15

Reforms to pension systems within OECD countries risk creating poverty amongst future pensioners, the OECD has warned.

Its biennial pensions review, Pensions at a Glance 2015, released yesterday, found about half of all OECD countries have taken measures to make their pension systems more financially sustainable in the last two years. While this has been successful, future generations are likely to view their entitlements as much less generous.

Angel Gurría, secretary-general of the OECD, said efforts to ensure pension systems are affordable in the long run are a “step in the right direction”, but there is a growing risk future pensions “will not be sufficient” in some countries.

“The long-term challenge is to design policies today that are flexible enough to adapt to the uncertainties of tomorrow’s world of work, while ensuring adequate living standards for retirees,” he said.

The report said many governments have shifted to indexing pensions according to price, as opposed to more favourable indexes like wages. It warned that while this might be attractive to governments on tight budgets, it runs the risk of fuelling pensioner poverty, as prices tend to increase more slowly than wages.

Governments across the OECD are raising the retirement age, which helps with pension system sustainability. However the report noted that while the average employment rate of people in their 50s and 60s is increasing, the average age of labour market exit remains substantially lower than even the current retirement ages in many countries.

Because of variations in health and life expectancy in old age the report said that such changes could also entail “distributive effects”, as the ability to work for longer varies between socio-economic groups.

It also warned that changes in the labour market could see tomorrow’s pensioners end up with a smaller safety net when they hit retirement age.

While today’s retirees typically worked for the majority of their lives in stable jobs, a job for life is not necessarily the norm for people starting out today.

There has been a decline in jobs with open-ended contracts and a parallel rise in temporary and precarious jobs. Unemployment rates among young people remain very high in many countries, as do long-term unemployment rates among older workers.

These factors all influence the amount of contributions individuals will make, and in turn how much they can claim back once they stop working.

It noted that a number of features of OECD pension systems work to offset the impact of shorter or interrupted careers, meaning on average old age pensions drop by around 1% for every year the individual is out of work. This is at least half of the amount if features such as short contribution periods for first-tier pensions or pension credits were non-existent.

Nevertheless the OECD recommended countries reassess their safety nets for pensioners who have not contributed enough for a minimum pension. These provide on average 22% of earnings across the OECD, but range from lows of 6% in Korea to highs of 40% in New Zealand.

The report flagged a number of countries that are of particular concern due to relatively high risks of pensioner poverty and low benefits. These include Chile, Korea, Mexico, Turkey and the US.

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