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The Impact of Changes in Second Pension Pillars on Public Finances in Central and Eastern Europe

Listed author(s):
  • Balázs Égert

This paper studies the impact of recent changes in second pension pillars of three Central and Eastern European Countries on the deficit and implicit debt of their full pension systems. The paper seeks to answer the following questions: i) what is the impact on the sustainability of Poland’s pension system of the decrease in the pension contribution going to the second pension pillar from 7.3% to 2.3% in 2011; ii) what are the implications of the recent changes on gross replacement rates; iii) does the weakening of the Polish second pension system have a different impact on pension system sustainability than a similar move in a Hungarian-style pension system with a defined-benefit first pillar and iv) how does Estonia’s temporary decrease in pension contributions compensated by temporarily higher future rates affect pension sustainability in that country. The simulation results show that in our baseline scenario the Polish move would permanently lower future pension-system debt, chiefly as a result of a cut in replacement rates. But using a combination of pessimistic assumptions including strong population ageing, low real wage growth and a high indexation of existing pension benefits, coupled with bringing in tax expenditures related to the third voluntary pension pillar and an increase in the share of minimum pensions leads to higher pension system deficits and eventually more public debt at a very long horizon. The simulations also suggest that the Hungarian pension reversal reduces deficit and debt only temporarily, mainly because of Hungary’s costly defined-benefit first pension pillar: the weakening of the second pillar is tantamount to swapping low current replacement rates (in the defined-contribution second pillar) against high future replacement rates in the defined-benefit first pension pillar. Finally, results show that the Estonian move will increase public debt only very moderately in the long run, even though this result is sensitive to the effective interest rate on public debt. L'impact des modifications du deuxième pilier du système de retraite sur les finances publiques en Europe centrale et orientale Cette étude analyse l’impact des changements récents apportés au deuxième pilier du système de retraite dans trois pays d’Europe centrale et orientale sur le déficit budgétaire et la dette implicite du système de retraite. Cette étude cherche à répondre aux questions suivantes : i) quel est l’impact de la baisse en 2011 de 7.3% à 2.3% des cotisations de retraite finançant le deuxième pilier sur la soutenabilité du système de retraite polonais ? ii) quelle est la sensibilité de cet impact en fonction des caractéristiques du premier pilier ? iii) quel est l’effet de ces changements sur les taux de remplacement bruts ? iv) quel est l’impact sur la soutenabilité du système de retraite estonien de la baisse temporaire des contributions de retraite contrebalancée par leur hausse temporaire future ? Les résultats montrent que l’affaiblissement du deuxième pilier diminue de façon permanente la dette future du système de retraite en Pologne, grâce à une baisse des taux de remplacement. Néanmoins, sous certaines hypothèses pessimistes portant conjointement sur le vieillissement démographique, l’augmentation des niches fiscales encourageant l’épargne volontaire dans le troisième pilier et la hausse des minimum retraites, le déficit et la dette du système de retraite s’accroissent à très long terme. Les résultats montrent aussi que les changements du système de retraite en Hongrie ne diminuent le déficit et la dette que temporairement, en raison essentiellement de la générosité du premier pilier : la suppression du deuxième pilier se traduit en effet, plutôt que par des taux de remplacement faibles du second pilier qui disparaît, par des taux de replacement futurs, du premier pilier, plus élevés. Finalement, la dette ne s’accroîtrait que faiblement en Estonie, même si ce résultat est sensible aux hypothèses sur le taux d’intérêt effectif sur la dette publique.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 942.

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Date of creation: 07 Feb 2012
Handle: RePEc:oec:ecoaaa:942-en
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  1. Monika Queisser & Edward R. Whitehouse, 2006. "Neutral or Fair?: Actuarial Concepts and Pension-System Design," OECD Social, Employment and Migration Working Papers 40, OECD Publishing.
  2. Andras Simonovits, 2011. "The Mandatory Private Pension Pillar in Hungary: An Obituary," IEHAS Discussion Papers 1112, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
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