How Should the Adequacy of Pension Coverage Be Balanced Against Financial Sustainability?
By Krzysztof Hagemejer & John Woodall
In recent decades many countries have “reformed” their contributory pension schemes, generally strengthening the links between benefit entitlements and the contributions paid over members’ working lifetimes, but primarily seeking to (re)balance them financially, in the face of strains arising from unfavourable labour market or demographic conditions. The result has been reduced benefit entitlements and levels of coverage, however assessed. The impact has been felt, particularly, by those with shorter, broken careers (due for example to longer spells of unemployment, precarious employment, or family care responsibilities) and with low levels of lifetime earnings. Countries have introduced “automatic” mechanisms which reduce benefits, but without countervailing mechanisms to prevent them from falling below poverty levels. Questions arise, therefore, as to how the adequacy of coverage and benefit levels may be secured, how the non-contributory elements of pension systems should be strengthened, and how much room is left to policy discretion when automatic balancing results in socially undesired outcomes. The issues are illustrated for the countries of the European Union, where extensive statistical data are available, but are important globally. Clearly, actuaries must play a key role in providing the relevant quantitative assessments, and some questions are raised as to the nature of their responsibilities.