VOLUME 1 Addressing Marginalization, Polarization, and the Labor Market Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes Robert Holzmann, Edward Palmer, Robert Palacios, and Stefano Sacchi Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes VOLUME 1 Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes VOLUME 1 ADDRESSING MARGINALIZATION, POLARIZATION, AND THE LABOR MARKET Robert Holzmann, Edward Palmer, Robert Palacios, and Stefano Sacchi © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 22 21 20 19 This work is a product of the staff of The World Bank with external contributions. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected]. ISBN (paper): 978-1-4648-1453-2 ISBN (electronic): 978-1-4648-1454-9 DOI: 10.1596/978-1-4648-1453-2 Cover photos (from left): © Eric Miller/World Bank; © Curt Carnemark/World Bank. Cover design: Bill Pragluski, Critical Stages, LLC. Library of Congress Cataloging-in-Publication Data has been requested. Contents Preface XIII Acknowledgments XIX About the Authors XXI Abbreviations XXXI 1. NDC: The Achievements and Challenges of Adulthood 1 Robert Holzmann and Edward Palmer I. Taking Stock 2. The Swedish NDC Scheme: Success on Track with Room for Reflection 27 Edward Palmer and Bo Könberg 3. The Latvian NDC Scheme: Success under a Decreasing Labor Force 51 Edward Palmer and Sandra Stabina 4. The Italian NDC Scheme: Evolution and Remaining Potholes 73 Sandro Gronchi, Sergio Nisticò, and Mirko Bevilacqua 5. The Polish NDC Scheme: Success in the Face of Adversity 91 Sonia Buchholtz, Agnieszka Chłoń-Domińczak, and Marek Góra 6. The Norwegian NDC Scheme: Balancing Risk Sharing and Redistribution 119 Nils Martin Stølen, Dennis Fredriksen, Erik Hernæs, and Erling Holmøy 7. The Greek Pension Reforms: Crises and NDC Attempts Awaiting Completion 141 Milton Nektarios and Platon Tinios V VI CONTENTS II. Conceptualization and Promotion 8. NDC: The Generic Old-Age Pension Scheme 167 Marek Góra and Edward Palmer 9. The ABCs of NDCs 189 Robert Holzmann III. Adjoining Zero Pillar with DC Schemes 10. Sweden: Adjoining the Guarantee Pension with NDC 215 Kenneth Nelson, Rense Nieuwenhuis, and Susanne Alm 11. Chile’s Solidarity Pillar: A Benchmark for Adjoining a Zero Pillar with Defined Contribution Schemes 241 Eduardo Fajnzylber IV. The Challenges of Longevity 12. Overview of Heterogeneity in Longevity and Pension Schemes 261 Ronald Lee and Miguel Sánchez-Romero 13. Annuities in (N)DC Pension Schemes: Design, Heterogeneity, and Estimation Issues 281 Edward Palmer and Yuwei Zhao de Gosson de Varennes 14. NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign 307 Robert Holzmann, Jennifer Alonso-García, Héloïse Labit-Hardy, and Andrés M. Villegas V. Accommodating Labor Market Change 15. NDC Schemes and the Labor Market: Issues and Options 335 Robert Holzmann, David Robalino, and Hernan Winkler 16. Labor Market Participation and Postponed Retirement in Central and Eastern Europe 371 Róbert I. Gál and Márta Radó CONTENTS VII Boxes 7.1 Recalibration of pensions-in-payment: A primer 146 7.2 Outline of the proposed three-pillar system for Greece 152 8.1 Definition of DC and DB schemes and their distinguishing features 177 15.1 New policy directions in the labor market 345 Figures 2.1 Average retirement age, select countries, 1970–2013 32 2.2 Indexation of NDC and transition benefits 35 2.3 Sweden’s balance (solvency) ratio under three scenarios, 2002–90 38 2.4 Historical and projected size of the NDC reserve fund under three scenarios, 2002–90 39 3.1 Development of Latvia’s working-age population (ages 20–64) and contributing labor force, 1995–2015 54 3.2 Latvian population projections, 2015–60 55 3.3 Latvian demographic dependency ratios, 2015–60 56 3.4 Rate of growth of real wage rate per capita and of contributors, and the rate of inflation, 1997–2070 57 3.5 Distribution of pensions by pensioner type, 2016–70 60 3.6 Expenditures on pensions, 2016–70 61 3.7 Expenditures on pensions—NDC and pre-1996, 2016–70 62 3A.1 Persons paying contributions one or more months per year 67 3A.2 Density of contributions paid 1–12 months in the years 1996–2016 69 4.1 Italy’s pension expenditure, 2000–70 76 4.2 Life expectancy and old-age dependency ratio in Italy, 2017–65 77 4.3 Italy’s wage bill versus GDP growth rate, 1996–2016 84 5.1 Inflow of new retirees by age and average retirement age, by sex, 1999–2017 96 5.2 Polish social insurance system finances 98 5.3 Decomposition of projected changes in the size of the population active in the labor force, 2020–50 relative to 2015 99 5.4 Expenditures and revenues of the social insurance system in Poland, 2001–17 102 6.1 Annual labor incomes and annual pension benefits in Norway’s old and new pension systems 122 6.2 Labor force compared with number of pensioners 128 6.3 Implicit contribution rate for pension expenditures under Norway’s old and new pension systems 129 6.4 Normalized simulated fiscal gap under Norway’s old and new public pension systems 131 6.5 Gross total public pension benefits under Norway’s new pension system by cohort, retirement age, and income level 133 6.6 Estimated distribution of pension benefits in 2050 by income percentile and gender 134 VIII CONTENTS 6.7 Net discounted value at age 62 for old-age pension benefits and contributions, all inhabitants 136 7.1 Pensions as a percentage of GDP in Greece, Germany, and Italy, 2003–17 147 7.2 Primary pension deficits for the proposal and 2015 and 2018 Economic Policy Committee projections, Greece, 2013–60 155 8.1 The evolution of thinking on public pension schemes 185 10.1 Relative income poverty in the elderly population and among those working age at various thresholds, 1995–2013 218 10.2 Anchored old-age poverty and equivalized median disposable income in different age groups, 1995–2013 221 10.3 Relative income poverty by household type, age, gender, education, and migration in the elderly population, 2013 222 10.4 Linear probabilities of relative income poverty in different elderly risk groups, 2013 223 10.5 Relative income poverty by gender in different elderly risk groups, 2013 224 10.6 Relative income poverty in different synthetic cohorts according to age 225 10.7 Developments in the income packages of a synthetic cohort born 1930–50 according to age 226 10.8 Reduction of relative income poverty attributed to different income components by elderly risk group, 2013 229 10.9 Income inequality, 1995–2013: Gini coefficients of disposable income of elderly and working-age populations 231 10A.1 Relative income poverty (60 percent poverty threshold) by household type, age, gender, education, and migration in the elderly population, 2013 237 11.1 Subsidies and final pensions under Chile’s New Solidarity Pillar 243 11.2 Old-age beneficiaries and average benefits, 2008–17 (July of each year) 245 11.3 Distribution of old-age pension beneficiaries and average benefits (with and without Pension Solidarity Complement) by gender and years of contributions 245 11.4 Coverage of Chile’s pension system, with and without the New Solidarity Pillar 247 11.5 Public expenditure (total and incremental) on Chile’s New Solidarity Pillar 248 12.1 U.S.