Pension Systems and Reforms: a Note on Transition Problems

The purpose of this chapter is to focus on some of the major problems of the existing pension systems. It is currently held that those systems exhibit fundamental imbalances which call for radical reform. It is in fact a widely shared view that current systems are unsustainable: hence the questions concerning the design of reform, together with the associated problem of identifying feasible patterns of transition from the inherited system to the reformed one. Accordingly the first issue to be addressed will be to highlight the fundamental imbalances affecting the existing systems and illustrate how they have come into being historically. Then the issue of the transition patterns will be tackled with reference to alternative reform designs; the argument, on this second point, will be mostly theoretical. Finally our considerations will be brought to bear on the actual features and on the current progress of the systems of the five countries treated in this report and a judgment on feasibility and likely prospects will be formulated. A questionnaire has been prepared for the five countries in this project. It is worth mentioning immediately that the problem of transition is currently understood to revolve basically around two main points. A first point concerns measures for starting a path leading from a redistributive or pay-as-you-go system back to the saving-insurance principle or, in other words, to a funded system; a second point touches on the share of private insurers in the pension business. Through tackling our question we expect to contribute to put such and similar issues in a proper perspective. The analysis of the kind of unsustainability involved here will allow us to see how far the proposed measures can actually promise to cope with the inherent problems. The current conventional wisdom on the transition issue calls for immediate clarification. It will be seen below that pension systems can be classified with respect to a number of contrasting characteristics, so that in principle it is possible to think of transitions between all the possible states defined in terms of all the sets of compatible characteristics. However, historically, taking the experience of major western European industrial systems into account, a few specific sets of characteristics need contrasting. Basically, we propose to focus on a few contrasting characteristics: payg vs. funded, defined benefit vs. defined contribution systems and redistributional vs. actuarial ones. The above clusters of characteristics provide important schemes to understand the present situation. Looking at future arrangements and at the transitions to them, it will be necessary to be more imaginative and also think of new schemes.