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Unbalanced pension system in the economy withheterogeneous agents.•Second World Congress of Comparative Economics “1917–2017: Revolution andEvolution in Economic Development” (Saint-Petersburg, 2017), Session Growth,Distribution and Policies, in collaboration with the Italian Economic Association, Fiscalpolicy under the unbalanced pension system;•XVIII International scientific conference devoted to the questions of economic andsocial development (Moscow, 2017), Pension system and complementarity of fiscalpolicy instruments;•XVII International scientific conference devoted to the questions of economic andsocial development (Moscow, 2016), Fiscal policy and unbalanced pension system;•XVI International scientific conference devoted to the questions of economic and socialdevelopment, (Moscow, 2015), Analysis of the government expenditure multiplier underzero lower bound: the role of public investment.13Structure of the thesisThe structure of the thesis is determined by the objective of the research.
The thesis consistsof the introduction, three chapters, conclusion, references and appendix with the total size of122 pages or 5.1 author’s sheet.PublicationsThe content of Chapters 1-3 is based on the following papers in order:1.Vlasov S. A., Mamedli M. O. (2017). Scenario analysis of pension system parameters inthe context of resilience of Russian government finances, Russian Journal of Money andFinance.
№ 8. pp. 26-34.2.Mamedli, M. O. (2016). Analysis of Government Expenditure Multiplier Under ZeroLower Bound: The Role of Public Investment. The Journal of Economic Asymmetries,Volume 14, pp. 103–111.3.Mamedli, M. O. (2017). Fiscal Policy and the Unbalanced Pension System, HSEEconomic Journal, vol. 21, no 1, pp.
114–144.14Chapter 1. Pension systems in OECD countries and in Russia91.1. IntroductionPopulation aging is a common problem for both advanced and developing countries.Within this context it is very important to develop the right design for the pension system,which provides an adequate pension provision and does not create excess pressure on thelabor market and public finances.OECD and G20 countries have significantly reformed their pension systems in the postcrisis period.
The reforms aimed to lower the pressure on the government budget, includingby stimulating voluntary pension savings and stimulating economic growth via theimprovement of labor market conditions. However, current trends are still a cause for concernand more fine-tuning reforms are under way.The situation in Russia is worse partly due to the fact that unlike many countries Russiarefused to carry out any pension reforms at the end of the 2000s to the beginning of 2010s andundertook reforms only recently.
Although several reforms were launched, the deficit of thepension fund and the need for transfers from the national budget are increasing, while thewelfare of Russian retirees is worse than in most OECD countries. One of the reasons is arelatively low retirement age compared to OECD countries, even when taking life expectancyinto account. That is why an increase in the retirement age is now under discussion in Russia.Kudrin and Gurvich (2012) wrote one of the main papers on pension systemarchitecture in Russia. They analyze the impact of aging on public finance: the consequencesto pension spending and the different ways to modify the pension system to accommodate theaging population, such as by increasing social contribution rates paid by employers to thePension Fund of Russia (PFR), lowering pension liabilities to some groups of retirees, andincreasing the ratio of working population to retirees, which includes primarily an increase inthe retirement age.
Their analysis shows that the latter is the most preferable way to achievesustainability of the pension system in the long-run.Attention is also paid to the impact of demographics on the labor market. Ivanova et al.(2017) consider the consequences of an increase in the retirement age on the labor market for9This Chapter presents an extended version of the research presented in Vlasov S. A., Mamedli M. O. (2017).Scenario analysis of pension system parameters in the context of resilience of Russian government finances,Russian Journal of Money and Finance. № 8.
pp. 26-34.15several scenarios. 10 Their calculations suggest that even a rapid increase in the retirement age(by one year annually up to 65 years for both men and women) would only partly mitigate thenegative outcomes of the expected deficit of the labor force, estimated at 6% of theeconomically active population.This chapter is organized as follows. Section 1.2 gives a brief overview and the maindevelopments in pension systems in OECD and G20 economies, showing the expecteddynamics of public pension spending and the position of Russia in the context of worldpension systems.
Section 1.3 provides an overview of the recent pension reforms in Russiaand forecasts of public pension expenditure up to 2035 under different assumptionsconcerning economic growth, demographic trends and possible pension reforms with respectto the sustainability of public finances. The last section provides some policy implications andconcludes.1.2. Overview of pension systems and recent pension reforms1.2.1. Key types of pension systemsRetirement regimes are diverse and differ from country to country.
According to OECDclassification three “tiers” can be defined: two mandatory “tiers” (an adequacy part and anearnings-related part) and a voluntary part (individual or employer-provided) (Figure 1.1).11The first tier is aimed at the insurance of a minimum standard of living for the retirees. Thesecond tier programs are designed to maintain a standard of living in retirement comparable tothe standard of living when working. Schemes in these tiers are divided into several categoriesby the provider (public or private) and the type of benefits.10The authors have considered a scenario without change in the retirement age, with an increase in theretirement age by 0.5 and 1 year per year up to 65 years for both men and women, and by half a year up to 63 formen and 62 for women.11OECD (2017), "Architecture of national pension systems", Pensions at a Glance 2017: OECD and G20Indicators.16Retirement-income systemFirst Tiermandatory, adequacyBasicSecond Tiermandatory, savingsPublicThird TierVoluntary, savingsPrivatePrivateResourcetested/socialassistanceDefinedbenefitDefinedbenefitDefinedbenefitMinimumpension(second tier)PointsDefinedcontributionDefinedcontributionNotionalaccountsFigure 1.1.
Different types of retirement-income provisionSource: OECD (2017), "Architecture of national pension systems", Pensions at a Glance 2017.The first tier consists of basic pensions, social assistance (resource-tested) andminimum pension plans. Basic pensions can be paid to everyone no matter the value ofcontributions made, or retirees may need to comply with certain criteria (e.g. years ofcontributions). Basic schemes or pension plans with a similar effect are present in 18 OECDcountries (Table 1.1). Social assistance plans either depend on income from the other sourcesor on both income and assets.
They provide higher benefits to retirees with low income andreduced benefits to retirees with a higher income. These schemes are present in all OECDcountries.12 Minimum pensions are realized via a minimum of a specific contributory schemeor applied to all schemes combined and may have redistributive effect in favor of workerswith low earnings. According to estimates provided in the regular OECD report “Pensions ata Glance” (2017) these schemes are present in 15 OECD countries.The second-tier provision is present in all OECD countries except for Ireland and NewZealand.
This could be based on a defined benefit, a defined contribution or point schemes orrealized as notional accounts. Defined benefit (DB) public schemes are present in 18 OECDcountries, while private schemes are mandatory or quasi-mandatory in three OECD countries(Iceland, the Netherlands and Switzerland). Income upon retirement in these schemes isdefined by the years of contributions and by the individual earnings.12In Table 1.1, in seven OECD countries, which are marked as having social assistance, the full-career workerswith low earnings (30% of the average) would be entitled to resource-tested benefits.17Point schemes are schemes where a worker earns points based on earnings, which areconverted into pensions at retirement.
They exist in four OECD countries (France, Estonia,Germany and the Slovak Republic). A points system is also present in Russia. Mandatorydefined contribution (DC) plans are present in ten OECD countries. These schemes operatevia individual accounts where contributions and return on investment are accumulated to formpensions at retirement. In Denmark and Sweden, there are quasi-mandatory, occupational DCschemes in addition to the smaller compulsory plans. A defined contribution scheme is alsopresent in Russia, although the saving part was “frozen” in 2014, and a possible reform of thepension system is under discussion (see Subsection 1.3.2).So-called notional accounts schemes (OECD, Pensions at a Glance, 2017) are present infive OECD countries (Italy, Latvia, Norway, Poland and Sweden).
They are based on theindividual accounts where contributions are registered and a rate of return is applied tobalances. The accounts are “notional” because the balances exist only on the books of themanaging institution. At retirement the accumulated savings form pensions according to aformula based on life expectancy. Due to their similarity to defined contributions plans theyare often called notional defined contribution plans (NDC).Table 1.1. Structure of retirement-income provision in OECD and G20 countriesBasicMinimumSocialassistancePublicPrivateT ypeT ype✓✓DBNorway✓✓DBPoland✓NDCPortugalSlovak Republic✓✓PointsDCSlovenia✓DBDCSpainCzech Republic✓Denmark✓✓Estonia✓✓✓✓✓PointsDBSwedenDB+PointsGermanyPoints✓✓HungaryIceland✓Ireland✓Israel✓ItalyNDC✓✓DBDCDBT urkey✓DBUnited States✓DBDBDBArgentina✓✓DBBrazil✓DB✓NDCChina✓NDC+DCDBIndia✓DB + DC✓NDC+DC✓✓DCNDCDBUnited KingdomDCDB✓DBDCKorea✓DBSwitzerlandDB✓✓LatviaMexicoDCDB✓FranceLuxembourgT ype✓ChileJapanPrivateT ypeNew Zealand✓✓GreecePublicNetherlandsDC✓BelgiumFinlandSocialassistanceDB✓AustriaCanadaMinimumO ECD members (cont.)O ECD membersAustraliaBasicIndonesiaDBRussian FederationDBSaudi Arabia✓DCSouth AfricaSource: OECD, Pensions at a Glance (2017).18DC✓Points✓✓DBDC1.2.2.
Recent pension reforms in OECD countriesAfter the financial crisis and sovereign debt crisis in Europe a lot of countriesintroduced changes to their pension systems, partly due to the need to decrease the burden ontheir budgets. In the last two years pension reforms in OECD countries have slowed downcompared to the period of 2009-2015. Nevertheless, there are still concerns about the financialsustainability and pension adequacy of the current pension systems in OECD countries.Most of the reforms include either an increase in the retirement age and tax incentivesor changes in the values of pensions or contributions.
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