Jozef Pacolet & Tom Strengs

1. Reinforcing our ambitionsHow to overcome the present financial and economic crisisLeuven - Belgium, 7 September 2009 Jozef Pacolet & Tom Strengs Organised by the Higher Institute of Labour Studies (HIVA-K.U.Leuven) – Katholieke Universiteit Leuven, Belgiumfor and in collaboration with the European Centre for Workers’ Questions (EZA)and in association with the Athenian Policy Forum (APF)This measure is funded by the European Community

2. Social Protection and Pensions: Absorbing the Crisis and Investing in the Future Jozef Pacolet & Tom StrengsHIVA, Katholieke Universiteit Leuven(jozef.pacolet@hiva.kuleuven.ac.be) EZA - HIVA Conference , 7 September 2009. Leuven, Convent of Chièvres, Grand Beguinage

4. Content • Desired and undesired deficit spending • The importance of public consumption and public employment: Rediscovering the merits of the social welfare state • The cost of a greying population • The three pillar pension system • The financial crisis and the pension system • Reinforcing the first pillar

5. 1. Public deficit: desired and undesired deficit spending • The additional deficit and debt comes at a very ‘inconvenient’ moment: according to some the additional efforts were too little • Some countries were still paying back the debt of past crises • With no space for additional fiscal efforts • All needed to prepare public finances for the cost of a greying population

6. Fiscal policies reflecting differences in room for manoeuvre

7. 2. The importance of social security benefits and public consumptionRediscovering Keynesian policies and the benefits of the welfare state • Automatic stabilisers and active fiscal policies • Support private consumption • Support public consumption by public employment: opportunity for some countries to close the ‘care gap’ and ‘job creation gap’ behind it • Should they be targeted? • For the moment supporting mostly consumption, should be oriented more to active labour market policies • Oriented to needs for the future (climate, energy, greying of the population) • Should be limited in time: opportunity to reassess fiscal revenues (fight against tax evasion but also tax avoidance, reinforce taxation of capital income, avoid fiscal and social competition and dumping) • Should be opportunity to assess the efficiency of public sector

8. General government expenditure by COFOG function, as % of GDP, 2003

9. Total employment in the private and public non-profit sector, as % of total employment, 2004

10. Total employment in the private and public non-profit sector, per 1000 inhabitants, 2004

11. 3. The cost of the greying population

15. 4. The case of pay-as-you-go and funded pensions: the crisis hits both… and in mixed systems twice?

16. 4a. The Three pillar system • The Washington consensus • Huge differences in pension mix • Huge differences in importance of pension funds and role as institutional investor • Since the eighties shift from defined benefit to defined contributions • Increased risk of investment and risk of longevity

18. Share of private pension systems in the OECD,2007, as % of GDP Source: OECD Private Pensions Outlook, 2009

19. 4.b The financial crisis and the pension funds • Since the eighties shift form defined benefit to defined contributions • Increased risk of investment and risk of longevity • The crisis hits pension systems differently • The crisis hits twice • Loss of pension wealth for pension funds: hits consumption further • In defined pensions additional cost for employer; counter-cyclical • Some pension funds were still recovering from the crisis of 2000-2003 and were hit again • Increasing doubts about performance of funded pensions • Market returns expected for the future are based on overestimated equity returns in the past, based on ‘irrational exuberance’ • Shifts to more secure portfolo’s will reduce return • Costs are relatively high and seems to reduce substantial the final result: (‘charge ratio’); danger of similar overaxpanded financial industry • The danger remains of ‘melt down’

20. Influence of the financial crisis on the pension wealth,(private and public) of the population, according to age Source: Pensions at a Glance, 2009, p. 26.

21. Return for pension funds, 2008

23. ‘Charge ratio’ for private pensions with defined contributions, 2007

24. 4.b The financial crisis and the pension funds (continued) • Need to similar surveillance and control (similar problems of oversigth) • Need for the state for pension guarantee fund • Risk of misselling and even fraud • Illusion of improved financial litteracy • There is no free lunch: important volume of savings effort and premiums, truncated by the costs • No guarantee of additional savings volume

25. 4.C The case for the pay-as-you-go system • Reinforcing the first pillar: is not only to avoid poverty (‘Beveridge type) but also to smooth consumption over life cycle (‘Bismarck type’) • Supplementary pensions should be supplement, not a substitution: risk that first pillar becomes the residuary system • PAYG is better able to spread macro-economic risks (economic crisis, inflation) over all generation • All pension systems need a debate on the flexible adaptation to changing economic and demographic situation: we need a debate on increasing labour market participation of older workers • The pay-as-you-go system is easier to upgrade now that there is need to stimulate consumption and restore trust (same reasoning when creating the social security after the economic crisis of the ’30)