ISSA International Conference of Social Security Actuaries and Statisticians
Paul Gini
Analyst
Social Policy Agency
When this conference – attended by over 130 delegates from 49 countries – concluded (under a hazy Athens sun in June of this year), it was clear that, while the focus of actuaries centred around the intricacies of financial measurement, fundamental concerns of public policy were never far from the surface. As the conference proceeded, the issues of concern to actuaries were closely related to those engaging public policy specialists generally.
However, a distinguishing feature of the actuarial perspective is emphasis on the long term. Economists were chided for their attention to planning horizons of five to ten years. For actuaries, planning must cover a lifetime, and seventy-five year projections of social security schemes form their staple diet. Self-contained social insurance schemes of various forms abound throughout most of the rest of the world. The task of actuaries is to project both the future income and expenditure of a scheme, using known rules and assumptions about influential factors, and make pronouncements about the scheme's sustainability.
The actuary's long-term focus does permit a disaggregation of effects that might in some quarters simply be accepted as an aging of the population. Within the actuary's time horizon, pension plans all faced difficulties in sustaining present benefit levels. Initially this resulted from the well-known baby boom, to be followed by the effects of expected ongoing improvements in mortality. But there was debate that future fertility rates may be even more important than mortality rates in determining the viability of plans.
While developed countries typically enjoy a full complement of social security schemes, either public or private, developing countries' schemes sometimes consist simply of an old age pension scheme. Sustaining the cost of these is a widespread problem. A World Bank publication, Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth, attracted some attention at the conference, promoting compulsory contributory schemes as a means of ensuring adequate retirement provision. To date New Zealand has shunned this approach and, with its tax-financed social security, is insulated to a certain extent from actuarial scrutiny. This means that the role of the actuary in assessing the viability of an unemployment insurance scheme or old age pension scheme is replaced by the macroeconomist analysing the Government's fiscal balance and net worth. These economic perspectives do have a somewhat shorter focus. It is only occasionally, such as in the deliberations of the Taskforce on Retirement Income, that long-term issues are debated in New Zealand, although government financial planning is moving to a longer horizon.
The opening session compared approaches to some of the problems that arise in the course of the long-term valuations of social security schemes. The methodology and standards of reporting were compared across a number of countries. Particular issues associated with the long-term analysis of pension schemes were then explored in a series of country papers.
The host country, Greece, paraded some of the difficulties it confronted in maintaining a health and social security scheme in an environment hampered by lack of commitment to economic reform. Despite growing government deficits, government expenditure showed no sign of abating. Both health and social security benefits appeared fragile. Projections presented of the old age pension scheme revealed a demographic conspiracy. The fertility rate of 1.38 is reckoned to be the lowest in the world (cf. New Zealand's below replacement level of 2.06). Mortality, too, is low, in spite of a national infatuation with tobacco, and life expectancy for females at birth already exceeds 80 years with projections of almost 85 by the year 2040. The aged population ratio (percentage of population over 65 years) was 15%, rising to over 25% in 40 years. Germany and Sweden shared the same burden. The sorry dependency ratios emerging indicate how unsustainable is the present regime. The present scheme consumed 15% of GDP and, with an "optimistic" assumption of 3% average annual GDP growth, could be maintained at that level. The "pessimistic" assumption of 1%, a little below the experience of Greece and above the experience of New Zealand over the past fifteen years, had this percentage almost doubling over 35 years.
Greek health care presented no fewer problems. Health reform of the 1980s styled on the British model had been attempted. Health expenditure increases greater than anywhere in the OECD had resulted. Private health investment had ballooned. Health services and social security were dominated by IKA, an organisation resembling a United States HMO (health maintenance organisation), but with some powers of both monopoly and monopsony. Attempts by it and its counterparts to contain costs had been singularly unsuccessful, possibly because (as the presenter reflected) concepts such as purchasers and providers of health care were not clearly defined within the Greek health system. Nor were there the machinery or commitment to contain costs.
In the face of the "tremendous" unfounded liabilities of Greek pension schemes, raising the retirement age seems a logical step, especially in the light of rising life expectancy. Results were presented to illustrate that raising pensionable ages from 65 (men) and 60 (women) to 67 and 65 respectively produced the same actuarial result as an additional 1% per annum GDP growth – a modest but not decisive return.
Raising the retirement age was not simply a concern of developed countries. A paper presented on a Costa Rican model, which simulated the operation of old age, invalidity, widows and orphans' pensions, highlighted the same problem of the aging of the population. Although fertility was relatively high, long-term projections indicated that the ratio of retired persons to employed persons to employed persons were rise 5% to 20% by 2050. It was little wonder that a permanent adjustment to the minimum retirement age was considered unavoidable. Currently minimum retirement ages were 62 and 60, with the gender biases in the usual direction, and retirement pensions were financed by 3% contributions of wages that were projected to exceed 12% by 2050. Yet extending retirement ages by three years towards developed country standards would only reduce retirement pension costs by around 25%.
The modelling approaches described in country papers varied widely, from simple extrapolations based on expert judgment to computationally extensive cell-based simulations, to general equilibrium models. At one extreme, Germany could point to a 1,800-equation general equilibrium model of the economy to predict pension outcomes. At the other end of the spectrum, developing countries lamented the difficulties of modelling in a data-free environment. In these circumstances, forecasting was, according to one delegate, more akin to soothsaying. New Zealand public policy analysts, frustrated by a lack of data, were in good company. A grand scale approach to address this, being undertaken by the Social Security Administration of the United States, consists of a manual check of a 0.1% sample of 137 million records to overcome data inconsistencies.
Although overseas social security schemes differ, the reaction to difficulties caused by aging of the population are worth noting. As social security schemes have matured and populations aged, there has been increasing interest in developing or facilitating complementary schemes through which individuals can contract out of a central pension scheme. These schemes developed in the period following the Second World War in advanced market economies, but interest in them has been accentuated by popular political and economic arguments favouring greater individual choice. (A domestic parallel can be found in our accident compensation scheme where large employers are able to take on an element of the accident compensation risk in return for a lower employer premium.)
The encouragement of complementary schemes takes a variety of forms. Australia, somewhat alone with New Zealand with its tax-based pension scheme, has made occupational pension schemes mandatory to take pressure off the public scheme. So, too, has Switzerland. A cynical view from this less regulated land is that compulsion will merely crowd out other forms of savings. Empirical evidence, cited from the World Bank, pointed to crowding out ranging from 20% to 60%, indicating that it is possible to increase national savings via this method, if not guarantee any return on the investment.
The United Kingdom and Japan allowed contracting out of that part of the public pension that was earnings related, provided an equivalent private plan was in place. Experience in the United Kingdom was described in detail, where 25% have chosen to contract out for personal pensions and 50% for occupational pensions.
Contestable competing plans have emerged in Central and South America, too, while Eastern European countries are just beginning the move towards occupational schemes. A particular problem faced by the Czech Republic was overcoming the legacy of the previous communist regime. A lack of confidence in savings institutions as a result of past bad experiences and a lack of a capital market, skills and data all made the transition more difficult, but did not seem to have dampened the speed of change over less than a year.
While approaches to overcome pension scheme problems vary, what really mattered, according to one presented, was the resource base generating the national product. New Zealand might well consider that when the issue of retirement incomes is next debated.
