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New figures on unfunded public pension entitlements across Europe: concept, results and applications

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Abstract

A major aim of the recent updates of National Accounting standards (SNA2008 and ESA2010) is to provide a more complete picture of households’ wealth. In this course it will become mandatory for European countries to publish annual estimates of unfunded public pension entitlements (UPPE) from 2017 onwards. This study describes the methodological concepts behind this new figure of national accounts. After a review of past studies we provide a large cross-country comparison for 18 EU countries and discuss a number of possible applications for policy makers and researchers. This includes the measurement of changes in pension obligations due to 2nd pillar pension reforms—observed recently in a number of Central and Eastern European countries. Also the use for estimating the offset between unfunded pension entitlements and savings rates (Feldstein in J Polit Econ 82:905–926, 1974) is discussed. Finally, we show the distribution of households’ wealth across Europe including financial wealth, dwellings and UPPE. With respect to the pre-financial crisis year 2006, our data indicate that taking these three wealth categories into account many differences between countries with Beveridgean and Bismarckian pension systems as well as between western and central eastern European countries are eliminated.

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Notes

  1. See Müller (2012).

  2. See Franco (1995), Holzmann et al. (2004).

  3. The terms UPPE and ADL are used synonymously in this study. Different definitions of UPPE are applied in the literature. Feldstein (1974), and other authors dealing with savings analysis (see Sect. 6), uses the concept of current workers’ and retirees’ net-liabilities (CWNL) as a proxy of UPPE—also termed as social security wealth. The variable of ADL can be regarded as an appropriate proxy of social security wealth, too, as it represents the main share of CWNL (Franco 1995, p. 18) and as both liability figures (ADL and CWNL) may even be identical under certain conditions (Holzmann et al. 2004, p. 13). Moreover, for wealth analysis accrued-to-date pension rights are a suitable estimate of UPPE, as they are most compatible with backward looking statistics.

  4. For an extension and estimation of net-liabilities of public pension schemes see e.g. Chand and Jaeger (1996) or Müller et al. (2010).

  5. Other approaches exist for the calculations of ADL such as the entry-age normal (EAN) approach. For more details on the actuarial methods see Novy−Marx and Rauh (2011).

  6. See e.g. Reinsdorf (2010), p. 190 et seq.

  7. In fact, the IPSAS25 require an entity to use the Projected Unit Credit Method which is equivalent to the PBO approach.

  8. These estimates are based on a large cross-country benchmark calculation carried out by Müller et al. (2009).

  9. In fact, Kuné (2000) in addition to the ABO outcomes shows also a PBO scenario. His definition of PBO, however, corresponds to the CWL Concept and is therefore not comparable to the other studies. See Kuné (2000), p. 43.

  10. See (Kuné 2000; Van den Noord and Herd 1993).

  11. See Holzmann et al. (2004), p. 34. These methodological specifications are discussed in the supplementary material which outlines in detail our estimation approach of ADL.

  12. Some countries, namely the Netherlands, Finland, Greece and the Czech Republic, have separate government employee pension schemes which are not covered in Fig. 1. The Dutch government employee pension schemes are funded and therefore not recorded in Fig. 1. For Finland and the Czech Republic government employee pension schemes have been recorded as social security expenditures. No separate data was available for Greece.

  13. Furthermore, the informational value of the replacement rate is limited as it outlines the relative pension level only for the group of new pensioners in the base year. All other retirees are not covered, even though their replacement rate may vary considerably from new pensioners.

  14. In some countries such as Austria and Poland these other non-old age pension schemes represent almost half of the overall pension expenditures. Consequently, the indicator of the gross replacement rate provided by the European Commission—covering only old age pensions of the statutory pension scheme—may be less representative for the overall generosity of public pensions in these countries.

  15. Increases in RA, generally, reduce ADL in the year of their legislation, as pension rights accrued are cut (via pension decrements) and/or paid out later in the future. In the long-run, however, increases in RA may raise ADL as the working career is (often) extended and therewith pension rights are accrued over a longer time span.

  16. See Oksanen (2010), p. 125. The discussion was recently stimulated by an announcement of the rating agency Moody`s to combine both conventional debt and implicit pension liabilities in their evaluation of credit ratings. See Hampton et al. (2011).

  17. See Soto et al. (2011), p. 5.

  18. See Franco et al. (2007), p. 812.

  19. For an overview of pension reforms see e.g. Table 5. But standard government debt is also subject to a great deal of risk, e.g. to inflation risk (disregarding inflation-linked bonds). Pension payouts, on the other hand, are usually indexed to price changes and therefore can be regarded as less risky in terms of price changes. See Bohn (1992), p. 45.

  20. See Holzmann (2001), p. 99.

  21. See e.g. Novy-Marx and Rauh (2009), p. 195 and Franco et al. (2007), p. 830. In Germany, e.g., accrued pension rights are protected by the German basic constitutional law (Grundgesetz) in Article 14, paragraph 1. For an exemplary case-law see BVG (1999). But also in other countries such as Poland, Argentina, Brazil and Croatia courts restricted pension reforms which would have lowered already accrued pension entitlements. See Holzmann (2001), p. 100.

  22. Some authors and politicians are skeptical of the consequences of recording unfunded public pension entitlements at all and of treating these pension rights similar to explicit contractual debt obligations. They are concerned that such a “cementation” of pension rights may impede pension reforms needed to guarantee fiscal long-term stability. See e.g. Boskin (1982), p. 300 or Oksanen (2010), p. 127. Others see positive consequences of a more explicit treatment of unfunded pension entitlements. It is argued that this increases the credibility of government promises which strengthens the perceived link of contributions and benefits. At the end this may reduce distortionary effects of social contributions on labor-leisure choices. See e.g. Bohn (1992), p. 12 et seq.

  23. See e.g. Franco (1995), Holzmann (2001) or Disney (2001).

  24. See Franco (1995). p. 6 and Eichhorst et al. (2011), p. 79.

  25. The calculations are based on the pension model described in Jablonowski and Müller (2013) and further adapted to the recent legal changes in Jablonowski and Müller (2014).

  26. More than one-third of mandatory pension contributions are channeled to the 2nd pillar under the legal framework of 2010.

  27. The roll back reform in Poland includes a package of reform measures. For further details see Jablonowski and Müller (2014), p. 18.

  28. The decline in ADL values over time in both reform scenarios is, furthermore, determined by the less generous (NDC) benefit formula applied for future new retirees as well as by changes in contribution careers.

  29. See Feldstein (1976) and Leimer and Lesnoy (1982).

  30. Shortly after the first cross-country studies were published (Feldstein 1980; Barro and MacDonald 1979), more and more variables had been tested for explaining international differences in saving rates: Koskela and Viren (1983), for instance, added the unemployment rate as a proxy for real income uncertainty which showed to affect aggregate private savings positively. Other studies (Callen and Thimann 1997; Kessler et al. 1993; Bloom et al. 2007) included variables like direct taxes, per capita public deficit or life expectancy into their analyses.

  31. In Europe, for instance, a large number of pension reforms have been enacted in recent years, but the extend of the relationship between financial wealth accumulation and pension entitlements is still scanty and incomplete (Attanasio and Brugiavini 2003). In his seminal paper Feldstein (1974) used aggregate time-series data from the US and determined displacement effects between -0.30 $ and -0.50 $ per additional $ of pension entitlements. A few years later Feldstein (1980) applied aggregate cross country data to determine a displacement effect of 0.37 $ per additional $ of pension entitlements. A recent approach using micro-data sets determined a displacement effect of 0.22 $ for every additional $ of pension entitlements (Hurd et al. 2012).

  32. Generally, the concept of current workers’ and retirees’ net-liabilities (CWNL) is used in savings analysis as a proxy of the so called social security wealth variable introduced by Feldstein (1974). The variable of ADL is, however, relatively akin to CWNL, see footnote 3. In fact, there are some authors who apply ADL instead of CWNL for savings analysis, e.g., Beltrametti and Croce (1997). In principle, the use of ADL (or CWNL) for savings analysis has some advantages compared to other pension wealth indicators, such as the current replacement rate (RR), often used in this context. ADL as an aggregate variable can reflect cohort-specific benefit levels which may differ due to (1) pension reforms and (2) changing employment histories (relevant, e.g. in transformation countries). The benefit level of current retirees reflected in RR may, therefore, be inappropriate to proxy anticipated pension wealth of future new retirees (current contributors).

  33. See Diamond and Hausman (1984), Jappelli (1995), Hubbard (1986), Attanasio and Brugiavini (2003), Kapteyn et al. (2005), Kapteyn and Panis (2005), Gale (1998), King (1982), Hurd et al. (2012), Blanc et al. (2014), Zanberg (2014), Arnberg and Barslund (2014), van Santen (2012) and Alessi et al. (2013).

  34. In detail, these datasets rarely contain sufficient information on financial wealth and even less on unfunded pension entitlements and typically cover relatively short time periods leading to the fact that pension rights do not exhibit much exogenous variation (Attanasio and Rohwedder 2003).

  35. See ECB - European Central Bank (2013).

  36. See Davies et al. (2011).

  37. For a further discussion of the scope and definition of UPPE see footnote 3.

  38. See Oksanen (2010), p. 126.

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Authors and Affiliations

  1. Department of Public Finance, Freiburg University, Freiburg, Germany

    Klaus Kaier & Christoph Müller

  2. Center for Medical Biometry and Medical Informatics, University Medical Center Freiburg, Stefan-Meier-Str. 26, 79104, Freiburg, Germany

    Klaus Kaier

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  1. Klaus Kaier
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Correspondence to Klaus Kaier.

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Kaier, K., Müller, C. New figures on unfunded public pension entitlements across Europe: concept, results and applications. Empirica 42, 865–895 (2015). https://doi.org/10.1007/s10663-015-9285-3

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