The Strategy of the Four Pillars in a Long-life Society

3.1. First-Pillar Reforms and Prospects

Public pension conditions, in particular in ‘Bismarckian’ countries (eg. Germany, France, Italy) where public pensions are high, have been tightened by the reforms. Either these reforms have increased retirement ages or will do so progressively (for example, from 60 to 65 for women, from 65 to 67 in Germany and Sweden, from 65 to 68 in the UK) or the number of contribution years (often to 42 or 45 years). Generally the link between the level of benefits and the level of contributions has been considerably reinforced. Furthermore in most countries the benefits are already or will in future be indexed to prices and no longer to wages, something which will make them much less generous in the long-term. The calculation of the benefits has also been modified, for example in a number of countries they are now calculated on the mean contribution over a much longer working period, leading to a de facto decrease in benefits.
In the EU15 Member States pension expenditure is now projected to increase from almost 11% today to around 13% by 2040, an increase which would have been greater had these important reforms not been passed.

3.2. Second-pillar Reforms and Prospects

Second-pillar or occupational pensions have been developing and are now compulsory in a number of countries (among them, the Netherlands, Nordic countries, Switzerland, Poland, Australia). In these countries around over 90% of workers are covered. However they remain non compulsory in some rich countries leading to a difficult situation for retirees. In the USA, for example, only half of workers are covered by an occupational pension scheme, and worse the percentage of those covered has not increased over the last two decades; according to some recent studies, indeed, even fewer employers would offer pension plans (see Section IV Report on the USA). Therefore the poverty rate among retirees is higher (over 20% of retirees) than in most OECD countries. At forums and in its publications the Geneva Association has been at pains to stress how important are legislation and collective negotiations in encouraging all employers to cover their workforce. In Switzerland there has been a positive development: although second-pillar contributions are still not compulsory for the self-employed, they are for all wage-earners and the income floor at which they are compulsory has been lowered (from 24 to 18 000 Chf per year) thus covering more part-time employees, often women — an improvement, the importance of which the Geneva Association was able to bring home to the authorities in Switzerland.
In most countries (for example, in Italy), reforms have the effect of making pension schemes more uniform (such as those covering civil servants) and many advantageous systems have had benefits to some extent curtailed. In a few countries (for example, France), this has not been allowed to happen for political reasons. Civil servants and other wage-earners in public (or previously public) companies each have specific schemes with very generous benefits (in comparison with those covering wage-earners in the private sector) which in the past were designed to compensate for lower wages. Today these benefits are taken for granted by retirees or by those about to retire but cannot be funded from the beneficiaries’ own contributions, and it is private-sector employees and the general public that end up paying for these ‘privileges’. All parties know that this contentious issue cannot be shelved for much longer…
Mostly the rules governing second-pillar schemes have shifted from a defined-benefit to a defined-contribution basis, making benefits less dependent upon employers’ promises, often unrealistic in the past. in the long-term these rules will progressively make occupational pensions more the responsibility of individuals, rather than of firms. They will also make for increased mobility for workers.

3.3 Third-Pillar Pensions

These private or personal pensions have also been strongly encouraged by recent reforms, often by fiscal deductions, especially in countries where second-pillar schemes are not generalized. In other countries life insurance products are playing the role of third pillar pensions. It is interesting to compare second-pillar pension funds and life insurance funds2. For example, in 2005 in Sweden, second-pillar pensions accounted for around 20% of GDP while life insurance products accounted for as much as 50%. The situation was the opposite in Finland where 2nd-pillar pensions represented 66% of GDP and life insurance 16%. In the USA 2nd-pillar funds were very high (93% of GDP) and life insurance represented 22% of GDP. In France life insurance was as much as 44% of GDP in 2005, while second-pillar funded pensions were only 6% (France is an exception: private sector second pillars are organized on a pay-as-you-go basis).

But of course other measures also need to be considered and adopted, and each European country is currently struggling to find the best cocktail of measures, i.e. that mix that will cause least social and political pain. Here are ten main solutions:
1. Make public pensions less generous (eg. Cont. Europe) relatively to wages.
2. Increase contribution rates/periods or raise taxes (not in Cont. Europe, except CH).
3. Make 2nd pillar (occupational pensions) compulsory for all workers.
4. Encourage savings (3rd pillar, life insurance, others).
5. Increase retirement ages (eg. women) — life expectancy increases must be shared between work and leisure life.
6. Provide incentives for the employment of workers beyond 60 and 65 years (make retirement flexible), in particular part-time or part-year.
7. Increase the general level of employment of women and of other cat. of workers.
8. Increase the entrance of young migrants (when possible).
9. Encourage higher fertility and a combination of education of young children and work of parents.
10. Facilitate a wide debate and the adoption of complementary measures/policies.

To conclude this 1st part, the following graph provides an estimation of what we believe will be the future trend for the distribution of retirement income between the ‘four pillars’ for a representative country in Europe.

Figure 2: Evolution of retirees’ income from the four pillars in 2000 and 2020
Source: The Geneva Association.

4. The 4th Pillar Proposal and the Development of Senior Employment in a Long-Life Society

If we now look at the other side of the coin — the employment side —, things have also started to improve in OECD countries. Most — not to say all — reforms have made pension conditions more flexible and are encouraging longer working lives, and later and more gradual retirement. One way of achieving this has been to put in place disincentives for early retirement and incentives for delaying exit from work. Combining income from work with a partial (or a full) pension is now possible. Of course in a number of countries (e.g. France, Italy) an important part of work after pension age is done on the black market and it is difficult to assess its real level.
Indeed one of the main targets of the EU for this decade is to increase the participation of workers beyond 60 so that we have a participation rate of at least 50% for 55-64 workers in 2010 and to reduce the gap between the pension age and the exit age from the labour market. Statistics show us that well-trained workers tend to retire later than less qualified ones; the cohort effect means that in future more qualified workers will be working in better work conditions and will benefit more from lifelong education and continuing training. They will retire later than today and in a more flexible manner than today.
What can we say in 2007? First, early retirement trends have started to reverse in most countries and the proportion of workers over 60 has increased. Several EU15 countries have adopted employment. While the answer to Why work beyond 60 is now obvious, the how and for whom are questions that require more subtle responses. More generally within the economy, but also socially and culturally the concept and practice of active ageing has been steadily gaining ground and the WHO and the European Commission have both been at pains to promote the concept. And this is where the EC and the OECD have begun to appreciate the full relevance and value of 4th Pillar thinking. We have, indeed, shown that meeting the challenges of a long-life society will inevitably involve a thorough rethinking of work conditions.
First it is important to realize that new social and employment trends constitute real opportunities for extension of work life.
The life cycle of the great majority of us has radically altered in recent years: the organisation of life into traditional three age-based vertical periods (training, work, retirement) is gradually giving way to a horizontal modern arrangement where we train, work, bring up families, spend our leisure time and retire differently than we did in the past. Continuing training and lifelong education are becoming an accepted part of life and work, part-time and flexible work have developed considerably. Moreover, most people are no longer ‘old’ at 60 or 65 (Orio Giarini has coined the term counter-ageing to describe this phenomenon) and many ‘age actively’ performing the voluntary and family activities that are essential for our communities. Overnight or guillotine retirement has been negative for generations of workers and surveys show that there is a strong need for a transition between full-time work and full-time retirement.

Figure 3: Life cycle: Age-based distribution of activities
Source: G. Reday-Mulvay, Geneva Association, 1999.

New major employment trends are also favourable factors for working beyond 60 or even 65. If we consider not only tertiary sector activities per se but also service functions in manufacturing and agriculture (such as research, planning, marketing, maintenance, storage, quality control, occupational safety and health, and distribution), we find that well over 80 percent of jobs in our economies are now of a service nature, and this trend is set to continue in the years to come. Not only are part-time and flexible employment more developed in services but most jobs in this sector involve primarily mental and social abilities. The latter hardly deteriorate over time and in some cases even improve with age. Not only have workforces become more feminised and older, but there still exist substantial untapped workforce reserves of women and older persons. Surveys show that these two categories of worker, declare themselves ready to work later than 60/65 if offered flexible work opportunities.
Therefore, policies which seek to help women and older workers reconcile work with family and health constraints and improve their pension rights will be making a very real contribution to meeting the challenge of ‘ageing’. Improvements in the work environment and organization will help senior workers stay active longer.

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