Global Pension Systems Ill-Prepared to Deal with Demographic Changes
Life expectancy has declined in many countries due to COVID-19 pandemic, but pensions systems across the world has remained ill-prepared to deal with demographic changes as the ageing of societies continues to accelerate, according to a new report from Allianz.
The second edition of the report entitled “Allianz Global Pension Report 2023,” which analysed 75 pension systems in the world, said that the pandemic would have a long-term impact on private households, state budgets, and pension systems.
The latest report from Allianz was prepared using its proprietary Allianz Pension Index (API), which contained three pillars – Analysis of basic demographic and fiscal conditions as well as determination of the sustainability (such as funding and contribution periods) and adequacy (like degree of diffusion and pension level) of the pension system.
The report considered some 40 parameters, with values ranging from 1 (very good) to 7 (very poor). In the weighted sum of all parameters, the evaluation of the respective system crystallizes into one overall score.
The COVID-19 pandemic has not only led to a decline in life expectancy in many countries; in a few, a baby boom could even be registered. However, this is only a short-term interruption of the unabated and accelerating trend of societal aging, readable in the global old-age dependency ratio.
It is expected to climb from 15.1% as of date to 26.3% by 2050 though an increase to only 25.3% had been forecast in 2019.
“The latest data from China, Korea, or Italy, for example, point to speedup of demographic change. Birth rates are developing even worse than assumed, despite all family policy efforts. But it doesn’t help to lament; we must face the facts: The intergenerational contract has become fragile. The younger generations Y and Z are being called upon to make (even) greater provision for old age themselves. The inconvenient truth is they have to work longer as well as to save more and in a more focused way,” the report found.
The unweighted overall score for all pension systems studied was 3.6, which was barely satisfactory. Compared to Allianz’s last report in 2020, this represents only a small improvement.
On the one hand, this is hardly surprising as after Covid 19, war and the energy crisis, the fiscal space of most countries has narrowed even further. On the other hand, however, it was very disappointing as the need for pension reforms was never disputed, but rhetoric rarely followed by powerful action with work on the pension construction site was not progressing.
In fact, only a few countries – such as France or China – have managed to significantly improve their scoring through reforms. France almost exemplifies the political dilemma of such reforms, as they turn the usual political economy on its head.
“Instead of handing out benefits today in exchange for impositions later, they require impositions today to avoid cuts later. The few pension systems that are doing well today – notably Denmark, the Netherlands and Sweden, with an overall score well below 3 – therefore also have one thing in common: they set the course for sustainability very early on, at a time when the demographic bomb was still ticking quietly.
They can therefore serve as a model for many developing countries, which also still have a window of opportunity to stabilize their pension systems. In many other countries, however, it will hardly be possible without painful reforms.
The report noted that in addition to the technical details, such as contribution levels and periods, there was a key adjustment for sustainable and adequate pension systems like the social value of work.
“Automation, digitalization and artificial intelligence are enabling universal access to education and thus new concepts of work. The dissolution of the rigid dichotomy between employment and retirement currently exists only for a privileged few. The pension system of the future starts by rethinking the world of education and work for all,” the report added.