Public pensions pose major challenges for governments, with costs rising as a result of demographic and economic trends. This study analyzes policy implications and recommends reforms to boost private retirement savings.
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In both developed and emerging economies, public pensions are typically the most significant items of social expenditure. Increasingly challenging demographic and economic environments have fuelled pressure for governments to spend more on pensions.
How can governments respond to these challenges? Recent experience and practice suggest that carefully designed reforms to pension systems can go a long way toward mitigating the impact of ageing populations on pension system sustainability.
In this study, we investigate how pension system design features could help diminish the impact of population ageing on public pension spending, considering country-specific retirement system objectives and constraints. We use a dataset produced by the annual Mercer CFA Institute Global Pension Index (the MCGPI dataset) under a partnership among Mercer, CFA Institute, and Monash University.
Our analysis of data covering 43 pension jurisdictions globally yields several key findings with significant implications for policymakers on how to mitigate the effects of ageing populations and other emerging pressures on public pension expenditures.Our analysis finds the following:
- Having basic pensions is costly and puts pressure on public pension spending.
- Raising the retirement age helps reduce public pension expenditure
- Imposing a minimum age for access to private retirement savings lowers public pension spending.
- Requiring retirees to take a proportion of their retirement savings as income streams lowers public pension expenditure.
- Having more defined contribution assets in the system reduces public pension expenditure.
Our key findings suggest that governments and policymakers should adopt policies to encourage longer working life, restrict early access to retirement savings, and promote higher private savings for retirement. Policies must ensure, however, that the costs to public finances of any incentives to save for retirement (typically in the form of tax concessions) do not exceed the resulting reductions in government expenditure on state pensions.