The next focus for pension policy: social sustainability

PaG 2015Stefano Scarpetta, Director, OECD Directorate for Employment, Labour and Social Affairs and Adrian Blundell-Wignall, Director, OECD Directorate for Financial and Entreprise Affairs, based on their editorial in the publication

The 2015 edition of Pensions at a Glance marks the tenth anniversary of the OECD’s flagship series on pension systems and retirement incomes. Ten years of scrutiny of member and G20 countries’ pension systems and policies, ten years of assessing and predicting workers’ pension entitlements, and ten years of recommending reforms that lead to more financially sustainable pay-as-you-go pensions and respond to citizens’ need for stable and adequate incomes in old age.

The good news is that the OECD’s call has been heeded in most countries around the world. The last decade has seen intense reform, with governments changing key parameters of their retirement income systems and, in some cases, overhauling the design of the pension schemes, often scaling down the ambition of public pensions and giving a larger role to funded defined-contribution retirement provision. The most visible progress has been made in raising official pension ages: 67 is the new 65, and several countries are going even further towards ages closer to 70.

Raising the pension age has been politically difficult in many countries as it is a parameter that is easily understood. Most citizens are not happy having to work longer, often for the same benefit, even though the time spent in retirement is still growing due to continuously increasing life expectancy. Setting a legal norm does not mean that all people actually work up to these higher ages. Workers still leave the labour market well before reaching the official pension age in several OECD countries. The gap between official and effective retirement ages, however, is gradually shrinking. Over the past ten years, employment rates of workers aged 55 to 64 years have been rising substantially in many countries: from 45 to 66% in Germany, for example, from 31 to 46% in Italy, and from 52 to 57%, on average in the OECD.

The combination of cuts in future pensions through higher pension ages, fewer options for early retirement, changes in the way benefits are calculated, and lower adjustments of pensions in payment on the one hand, and more people working and contributing longer, on the other hand, has greatly improved the financial sustainability of pay-as-you-go pension systems. The European Union’s Ageing Working Group, for example, foresees a stabilisation of public pension spending as a share of GDP between 2015 and 2060 for most European countries, and in some cases, even reductions in spending, although from a much higher levels than projected just a few years ago.

Does this mean that all is well and that countries have managed to solve the pension puzzle we described in previous editions of Pensions at a Glance? Unfortunately, the answer is no. Fixing the financial challenges of pay-as-you-go pension systems is only one part of the equation. The other part relates to social sustainability and whether pensions in the future will be sufficient to provide adequate living conditions for older people. Today, the majority of OECD pensioners enjoy as good living standards as the average population. This is not surprising: many of today’s retirees, at least men, have worked for most of their active years in stable jobs. However, a “job for life” and even a “career for life” are rare for people starting out today.

Unemployment rates, in particular among younger groups, continue to be high in many countries. While older workers were less hit by the economic crisis than in previous downturns, their long-term unemployment rates are still unacceptably high. And we need to be realistic: working longer is not an option for everybody. Some people will have to retire early due to job strain and declining health no matter how high the pension age is set. Time out of work means time out of the pension system. Even though many countries provide pension credits during periods of unemployment, maternity or sick leave, future pension entitlements will be lower for many workers. And for the most unfortunate of tomorrow’s pensioners, those young people who do not manage to enter the labour market, the outlook is even more dire.

The second major challenge relates to the investment of retirement savings. When the financial crisis first struck, public attention focused on the impact on pension funds and the losses that some workers had to shoulder. In most countries vulnerable retirees were largely protected from falling into old-age poverty through the interplay of private and public pension systems, but many middle-class workers who were close to retirement were forced to radically change their plans for their life after work.

New longer-term difficulties have emerged in the aftermath of the crisis. The current low-growth, low-interest rate environment is making it difficult to earn the returns necessary to reach adequate pension levels, both for individual savers and financial service providers who have to honour offer life insurance and annuity contract obligations. In addition, mortality tables used in many countries do not fully incorporate projected improvements in life expectancy. This can lead to pension funds and life insurers starting to look for higher yields and to pursue riskier investment strategies that could ultimately undermine their solvency. Apart from posing financial sector risks, this behaviour potentially jeopardises both current and future retirement income security. Pension savings are ideally made over a long period over which returns might substantially rise again, but this is difficult to predict with any degree of certainty.

One trend that is certain, however, is the shift from defined-benefit schemes, where the employer shoulders the risk, to defined-contribution schemes, where the risk lies with the individual worker. This trend, well entrenched in occupational pension schemes, is also observed in public pension schemes with much closer links between workers’ contributions and their pension benefits, and benefit formulae which more and more often take into account increases in life expectancy.

After putting pension systems on a more sustainable financial track, policy makers now have to ensure that pension systems provide adequate retirement incomes to all workers. All countries have old-age safety nets in place, but in some cases these are still not strong enough to protect most of the elderly from falling into old-age poverty. But adequacy is not only about preventing poverty. More than ever, we need consistent and coherent coordination of labour market, social, pension and financial sector policies to ensure that people’s careers and life-courses are accompanied by the most effective measures to help them maximise their chances of retiring comfortably.

Many countries are offering pension calculators in order to show people what benefits they may expect in the future based on their personal career and contribution developments. These real-life tools complement the OECD’s pension calculator and can help raise awareness both among individuals and policy makers. Let us make sure that they are used in time and prompt action to prevent people from encountering nasty surprises when it is too late to change course.

We at the OECD are looking forward to the next decade of supporting countries and policy makers around the world in their analysis of pension systems and their design of pension reforms.

Useful links

OECD work on insurance and pensions

Time for your check-up

How much do you know about health? Take the OECD Health at a Glance 2015 quiz and find out. The data visualisation below will help.

Moving beyond agriculture: It’s food that matters!

marketThomas Allen, Sahel and West Africa Club (SWAC)/OECD Secretariat

We have to face facts: agriculture’s role in the food economy of West Africa isn’t as important as it used to be. Today, 40% of the agro-food sector’s value added is no longer produced by agriculture. Agriculture remains a pillar of economies in the region, but the food chain’s downstream segments are evolving in line with changes in society. West African politicians need to take note of these evolutions and act accordingly if the region is to take full advantage of its domestic market growth potential. Food and nutrition issues are no longer solely agricultural in nature, and agricultural policy no longer addresses them all.

In West Africa today, as many people depend on non-agricultural activities for their livelihoods as are engaged in agriculture. This is the major transformation of the past 60 years. It is inextricably linked to the explosion in towns and cities that one can see just by looking at a map of the region. Never in the history of humanity have as many people moved and have as many cities emerged in such a short time. Today there are 2000 towns with over 10,000 inhabitants; in 1950, there were 150.

There are now 150 million urban dwellers, 30 times more than in 1950. Between 2000 and 2015 alone, the West African urban population grew by over 60 million people. That’s like adding a country the size of France to the region. And this growth is no longer only fueled by rural migration: most of these people were born in cities.

As a result of urbanization and income growth, the West African diet is changing. This is in turn impacting food security and nutrition. Diets are diversifying, especially in urban areas. More fruits and vegetables and more processed foods are being consumed, with the latter now representing at least 39% of urban households’ food budgets. Even more surprisingly, the poorest rural households devote 35% of their budget to processed foods, showing that these are not limited to the urban middle class.

These figures remind us of a simple truth: Almost all foods are processed in some way. We do not eat wheat or maize, but rather bread and a multitude of other products from their flour. Millet is crushed, cassava is soaked, shredded, crushed, dried, roasted, fermented, etc. Millions of women have participated in these sometimes laborious tasks, and today some devote all their energy to them. This is, for example, the case of Georgette* in Cotonou, who specializes in the preparation and sale of mawé or “dried aklui“, granules of maize flour that can easily and quickly be used to make a kind of porridge. The form that this market development takes can come as a surprise to those who automatically associate processed foods with supermarkets or frozen foods; do not expect the streets of Bamako or Niamey to be covered overnight by the franchises of a famous fast food chain!

More and more men and women work in the logistics and marketing of food products. Quantities exchanged on the agricultural and food markets have exploded: households now turn to markets as their main source of food supply, providing at least two-thirds of their food consumption. Total transactions amounted to $120 billion in 2010. It is by far the largest West African market. If you add the fact that urban populations consume 50% more than rural populations and that there is no sign of urbanisation slowing over the next two decades, it is easy to understand investor interest. Helping to co-ordinate these various actors is more important than ever before.

However, there is an additional difficulty: the largest share of this economy is informal. And it would be unrealistic to seek to formalise it today. We need to be more creative than simply suggesting investment frameworks. Experiences elsewhere can inspire ways forward, such as the Qali Warma programme in Peru that revised public procurement procedures so that local food producers could supply school meals for children between the ages of 3 and 6. This initiative is a good illustration of the challenges to public action today, namely how to simultaneously release people’s energies and devise institutional mechanisms that ensure the coherence of an increasingly complex agro-food system.

*Names have been changed

Useful links

ECOWAP+10: ten years of the ECOWAS Common Agricultural Policy

Changes in the agro-food economy and their implications OECD/SWAC and ECOWAP+10

Settlement, Market and Food Security, West African Studies, OECD/SWAC

2015 Sahel and West Africa Club Forum

Please visit the SWAC blog for more views on regional issues in West Africa.

Generation wait? Understanding the millennials

Time magazine millennials
You or someone you know?

Julia Stockdale-Otarola, OECD Public Affairs and Communications Directorate

Millennials are “lazy, entitled narcissists”.

No, millennials are multi-taskers, tech-savvy and confident.

The media has offered various contradictory views regarding the characteristics that best define the millennial generation and the labour situation they face.

So, who are they? Simply put, the term millennial refers to anyone born between the 1980s and the early-mid 2000s. No doubt you know some of them well. They might be a family member or perhaps a colleague. Maybe you’re one yourself. I’m a millennial.

And what do we know about their struggle to enter the labour market? There is growing concern that millennials are a “scarred generation”. That is to say that today’s poor labour market performance and un- and underemployment will negatively impact future labour market outcomes. In other words, this means that if you were to graduate without a job or in a low-wage job you are more likely to be affected by unemployment and lower earnings later in your career.

Following the 2008 crisis, youth, particularly those with low educational qualifications, have struggled more than adults to bounce back. Between 2007 and 2012 the number of employed youth fell by more than 7.5 million in OECD countries. Indeed, youth increasingly confront inactivity, precarious work, under-employment – and youth unemployment remains above its pre-crisis levels in numerous OECD countries. The term NEET (not in employment, education or training) continues to come up in the headlines. Approximately 22 million young people are NEET and more than one in five young people aged 15-24 have been out of work for more than 12 months. The persistence of this problem can also be seen when the NEET population is broken down by age, as most NEETs in OECD countries are in their 20s, with 45% of NEETs aged between 25 and 29. Those who are able to find work also voice concerns regarding job quality. Unpaid internships, short-term contracts and temporary unemployment seem to be the norm. This offers youth limited stability and social protection. Even highly-educated youth are more likely to take temporary positions, resulting in under-employment and contributing to the exacerbation of labour market segmentation in some countries.

So how are millennials coping? Despite varying situations within and across countries, one theme persists in my discussions with other young professionals and students. Millennials are worried about their futures and those of their families. Uncertainty is the mot du jour. After checking all the boxes: continuing education, getting good grades, volunteering, interning, working, and being involved in student life, they’ve joined the ‘real world’. But for many it isn’t living up to expectations. The future seems burdened with crippling student debt, little to no savings, and you can forget about pensions in retirement. Millennials have observed how Generation X struggles to make ends meet and achieve work-life balance. And so, they question what’s in store for them. Increasingly risk adverse, many are delaying major life decisions. Buying a home, going back to school or having children just doesn’t seem worth it or even possible… At least not yet.

But millennials aren’t alone. Real wages have slowed in 25 out of the 30 OECD countries which had available data and are declining in more than one third of countries. Though unemployment is slowly declining, it remains high at above pre-crisis levels in the OECD. Many workers believe the labour market offers minimal wage growth, lacking opportunities for training and progression, excessive overtime hours, and limited flexibility. Millennials and young parents are simply the most dissatisfied. To ease the strain workers are seeking greater flexibility, paid parental leave, and onsite or subsidized child care. Changes to the employment contract, an ageing and an increasingly multigenerational workforce, and changing family dynamics mean we need to rethink policy. We need better options.

Many governments have made significant efforts to support youth. The OECD has an Action Plan for Youth and youth employment initiatives are sprouting around the globe. The European Union has made youth employment a priority with the Youth Guarantee, committing member states to offering all NEETs training or work within a few months of graduation or becoming unemployed. Individual states have also invested in youth to facilitate school-to-work transitions. All these efforts play an important role in improving the current situation but there’s still more work to do. Pension, family and labour policies can all have an impact to provide greater stability for youth throughout their careers and ensure that the challenges of today do not dictate the future.

We need to work together to support policies that consider all generations and move towards greater intergenerational solidarity. So strike up a conversation with your grandparents, your colleagues, or that Master-educated barista – there’s something to learn from everyone.

Useful links

The OECD Skills Outlook 2015 focuses on “Youth, Skills and Employability”

OECD Better Life Index

OECD’s How’s Life? 2015: Measuring Well-being

Local Implementation of Youth Guarantees: Emerging Lessons from European Experiences


OECD work on youth

OECD Action Plan Youth

Keeping capital flows orderly

Capital movementsAdrian Blundell-Wignall, Director, OECD Directorate for Financial and Enterprise Affairs, Special Advisor to the Secretary-General on Financial Markets

The global financial and economic crisis of 2008 left the international monetary system with vulnerabilities caused by volatile capital flows and spillovers from national policy responses, even if international co-operation helped to avoid the scale of restrictions on goods and capital flows that prolonged the Great Depression of the 1930s. The current policy environment has moved multilateral co-operation, openness and transparency to the top of the capital flow policy agenda. A new capital controls dataset suggests traditional residency-based capital controls are back in use. OECD research has also noted that measures restricting banks’ operations in foreign currency are rising. This lingering legacy is challenging a fundamental principle supporting globalisation – that economic development sooner or later requires that a country allows capital to move more freely across borders.

It is pleasing to note that major non-OECD emerging economies, and in particular the world’s second largest economy China, are opening up their capital accounts in order to participate fully in the global economy. In Latin America, Colombia and Costa Rica are following the path of their OECD neighbours Chile and Mexico, and have made credible commitments to progressive liberalisation. Brazil is participating in discussions at the OECD on capital flow management and liberalisation. South Africa is modernising its capital markets and foreign exchange regime as a general drive to financial liberalisation, while India is looking at allowing fuller capital account convertibility in the next few years.

Furthering the process of opening up capital movements will go a long way in addressing some of the structural imbalances that created frictions in the global economy prior to the 2008 crisis. Restrictions on the capital account often go hand in hand with foreign exchange interventions to perpetuate undervalued exchange rates and export-driven growth models. Currency convertibility, on the other hand, is an important contributor to the efficient allocation of global resources and economic growth. Indeed, the deepening of global foreign exchange liquidity engineered by a broad openness agenda will reduce the perceived need for macro-prudential policies that guard against key currency mismatches in crisis situations. Such policies work in the opposite direction to improved global liquidity.

Caution must be applied when employing capital flow measures (CFMs) for declared macro-prudential purposes. OECD research shows that evidence on the effectiveness of currency-based restrictions as a counter-cyclical macro-prudential buffer is not robust. Some of these restrictions can just serve the same role as traditional capital controls to neutralise the domestic credit implications of engaging in foreign exchange interventions and managing the exchange rate. Countries concerned with financial stability risks that may arise from global credit push factors could use Basel III-inspired liquidity coverage ratios and net stable funding ratios as alternatives to CFMs, while working to foster the broad openness and convertibility agenda of major new players.

Global growth prospects have again weakened, … and this can be attributed to lacklustre investment”, stated Angel Gurría, the OECD’s Secretary-General, at the recent OECD-G20 Global Forum on International Investment. New OECD evidence using a sample of 10,000 of the world’s largest listed multinationals suggests that capital controls, far from helping business, are associated with highly significant negative effects on company capital spending, in part related to reduced FDI inflows. Similarly, countries with capital controls during the 2008 crisis did not restore liquidity or recover more rapidly than those avoiding such measures.

To reignite global growth, investment and foreign exchange need to flow seamlessly across borders in order to fund investment, improve global liquidity and to foster productivity growth via competition in the market for corporate control. Capital flow liberalisation must not be undermined as countries seek to shore up their financial systems and strengthen financial regulation. Progressive, sequenced liberalisation, mindful of vulnerabilities stemming from large and high financial flow volatility is called for, underpinned by a clear benchmark.

The OECD Code of Liberalisation of Capital Movements provides such a benchmark. A legally-binding instrument, it has provided a tried and tested process for international dialogue for over 50 years, a mechanism which is needed today more than ever. While liberalisation of trade in goods has been directed by the type of international rules and governance that the World Trade Organisation provides, globalisation in financial markets beyond the Codes’ adherent countries occurred in a more fragmented and uncoordinated manner.

Used by the 34 OECD countries including emerging economies, the Code is now open to non-OECD countries. It is a living instrument adaptable to countries at different levels of development, through built-in flexibility clauses that allow temporary suspension of commitments in times of economic distress and financial disturbance. Over time, the adherents have developed a body of well-established jurisprudence on the implementation of the Code’s rights and obligations and the conformity of individual country measures, all vetted by regular dialogues among peers.

Currently, work is underway to review the Code in light of the changing global financial landscape. The Code can provide a platform for sequencing reforms for the emerging and liberalising economies. The Code can also shed light on macro-prudential measures that are not currency flow measures and thus help to support a positive policy outcome that minimises disruptions to cross-border flows. But there is more work to do. The Code’s liberalisation standards and safeguards require review to ensure they are fit for purpose in the post-crisis environment. There is an array of views as to how far-reaching this review should be and how it should be organised. The strength of the Code is one of its key attributes but there is a need at minimum to clarify its broad scope since new forms of capital flows restrictions are on the rise. This will ultimately be a debate on the desirable features of a multilateral regime for cross-border capital movements. The OECD is well -placed to host such a debate.

Useful links

Blundell-Wignall, A., Roulet, C., (2015), Evaluating capital flow management measures used as macro-prudential tools (forthcoming).

Blundell-Wignall, A., Roulet, C.,(2014a), Capital controls on inflows, the global financial crisis and economic growth: evidence from emerging economies, OECD Journal: Financial Market Trends, Volume 2013/2.

Blundell-Wignall, A., Roulet, C., (2014c), Problems in the international financial system, OECD Journal: Financial Market Trends, Volume 2014/1.

Blundell-Wignall, A., Roulet, C., (2014b), Macro-prudential policy, bank systemic risk and capital controls, OECD Journal: Financial Market Trends, Volume 2013/2.

De Crescenzio, A., Golin, M., Ott, A., (2015). Currency-based measures targeting banks – balancing national regulation of risk and financial openness. OECD Working Papers on International Investment 2015/3.

Fernández, A., Klein, M., Rebucci, A.,Schindler, M., Uribe, M., (2015), “Capital Controls Measures: A New Dataset” NBER Working Paper no. 20,970.

OECD’s approach to capital flow management measures used with a macro-prudential intent, Report to G20 Finance Ministers, April 2015

OECD, Co-operation on approaches to macro-prudential and capital flow management measures, IMF/OECD update to G20, September 2015