Data & proxies
The European social model is challenged by decreasing fertility rates, higher life expectancies and the recent financial crisis. As member states are committed to provide sustainable and adequate pensions, they constantly have to review the sustainability of their systems and implement reforms to cope with the population ageing without destabilizing public finances. For our analysis we choose the three countries Austria, Greece and Sweden. Our aim was to analyze a variety of different pension systems, not only different in their pension structure but also in their recent sustainability. Consulting the “2014 Pension Sustainability Index” suggests Sweden as a highly sustainable system with minor need for reforms. Austria in the mid-table has a quite sustainable pension system but needs to implement reforms to keep sustainable in the future. Greece made huge improvements in its sustainability due to the recent reforms implemented with the Troika but still remains in the lower field. In our opinion these three countries give a diversified overview of the European social model.
Data & proxies
The base year of the three countries is 2010. The actual data for 2010 was collected from the Eurostat-database and from “Pensions at a Glance 2013”-report of the OECD (the contribution rates).
Contribution rates are differing among countries because of different pensions systems. Austria and Greece first pillars account for more than 90% of the total pensions, while in Sweden 50% of the working population has private assurance contracts and employers are providing occupational pensions (4, 5% on wages). For that reason the contribution rate of Sweden is increased. The average pension is computed by dividing the total expenditures on old age pensions in 2010 by the number of pension beneficiaries in 2010.
The forecasted evolutions of the number of employees and number of pensioners of “The Ageing Report 2012” of the European Commission were used to compute growth rates compared to the situation in 2010.
The proxy used for the wage evolution is the labor productivity growth (per hour) also gathered from “The Ageing Report 2012”. The assumption made is that if productivity increases, total production increases, so demand for labor increases, what will result in higher wages. Additionally, the wage level is connected with marginal productivity in the neoclassical model.
The growth rate of pensions should also be positive: In general total contribution per person increases since wages increase over time, which will result in a desire for higher pensions. This term is calculated endogenous in the model.
The growth rate of the pensions was computed out of the equation of the growth rates of the baseline scenario: p = c + w + l – r (p= growth rate of pension, c= growth rate of contribution rate, w= growth rate of average wage, l= growth rate of number of employees, r= growth rate of pensioners). Since no policy changes are mandated in the baseline scenario the growth rate of the contribution rate is zero.
The formula used to check the sustainability of the pension system is:
PR = CWL
(with P=average Pension, R=number of pensioners, C=contribution rate, W=average wage, L= number of workers) Calculations were made for 2010, 2020, 2030, 2040 2050 and 2060.
To check the sustainability, expenditure is compared to income on wage contribution. If the gap between income and expenditure is rising the conclusion of unsustainability was made.
After computing the baseline scenario a second scenario was made for each variable separately to compute the value it should have to create a sustainable situation, ceteris paribus. For example:
This formula was used to compute the needed average wage if the rest of the values remained the same.
The Greek pension system has experienced a lot of reforms since the beginning of the crisis. The system has been modernized to cope with the challenges of population ageing and decreasing sustainability. The Greek pension system is based on three pillars. However, more than 90% of retirement income is derived from the first pillar. The first pillar is divided into three main categories of pension benefits: main pensions, auxiliary pensions and lump sum amounts of grants (on which big cuts have been made during reforms). The public pensions are defined-benefit and work as a pay-as-you-go system (PYGO). Due to the Memorandum of Understanding (MoU) between the Greek government and the Troika (IMF, Commission & ECB), significant changes in pensionable income and replacement rates were introduced, retirement age and length of service increased so as to be equalized across the working population. In addition to that, there have been administrative improvements. Now, the retirement age is set at 67 in combination with 40 years of contribution. The pension benefit is calculated on the average income for the whole career instead of only the 5 to 10 last years. Another important improvement is the implementation for a government expenditure limit. Due to this limit the system becomes self-correcting and gives the government the opportunity to face changing circumstances faster. The indexation of pensions is legislated and cannot exceed the CPI.