Pension reform and equity by Benedict Clements, Csaba Feher, Sanjeev Gupta published by VOXEU (7/2014)
“The discussion on pension reform typically centres on fiscal sustainability. This column argues that equity concerns are of primary importance, both in selling proposed reforms to the public, and as a first-order policy goal of the pension system. Focusing on the average pensioner is insufficient to evaluate policy.
Pension reform remains a critical fiscal policy challenge for advanced and emerging market economies. Despite reform efforts in these economies – which have focused on raising retirement ages and reducing benefits – spending is expected to rise as a share of GDP over the medium-term (EC 2012, Merola and Sutherland 2013). But pension reforms, to be politically acceptable, must also be perceived as fair. This column examines key equity challenges in the design of pension reforms, drawing on a new book published by the IMF (Clements, Eich, and Gupta 2014).
Equity challenges
The objectives of recent reforms to public pay as you go systems – such as increasing retirement ages and making pension indexation less generous – were to contain expenditure growth and help reduce budget deficits. But because pensions play such a central role in distributing income both within and across generations, these reforms can have important ramifications for equity.
Intra-generational equity in pension systems is affected by numerous factors, most importantly coverage: even if a pension system is internally equitable, it may aggravate inequality if certain disadvantaged groups do not participate…”
