Public Workers’ Pensions Tour de Horizon

Public Workers’ PensionsTour de Horizon INTERNATIONAL SEMINAR PENSION SCHEMES FOR CIVIL SERVANTS AND PENSION FUNDS Itamaraty Palace, Ministry of Foreign Affairs, Esplanada dos Ministérios, Brasília, Brazil, 01-02 October 2003 David LindemanConsultant to OECD* *The presenter is greatly indebted to Edward Whitehouse, Axia Consulting, for use in this presentation of materials from Mr. Whitehouse’s forthcoming paper on public sector pensions.

Historical Perspective • Formal pension regimes begin with covering occupations with lifetime tenures – academic world, financial institutions, military, and government. • Substitute for prior, more informal and discretionary arrangements • “Civil Service” reform that limits patronage, then some 20-30 years later the need for civil service pensions emerges. • Note “civil service” in some countries means all government workers (e.g., US); in others, term is reserved for national level government workers, or even a smaller elite group. • Public worker pensions – especially separate ones – often have higher accrual rates and better retirement options than in private sector firms covered by national regime – even when supplementary pensions are also taken into account.

Integrated or Separate • Are all, some public workers: • included in national social insurance regime, often with a supplementary (top-up) scheme, or • in fully separate (stand-alone) regime? • If separate regime, • largely parallel to the national regime? • otherwise coordinated with national regime? • Integration usually depends on -- • timing of civil service reform and national social insurance’s introduction • country’s size and where unitary or federal structure • country’s social insurance style (unitary or disparate)

Why integration, parallelism or coordination? • Labor mobility between public and private sectors owing to “portability losses”. • Loses from not being vested. • Loses from inflationary erosion of vested benefits. • Minimize coverage gaps in disability and survivors protection. • Fair burden sharing of any redistribution in national regime • Prevent “windfalls” and “gaming” that benefit the favored few. • Concerns about portability losses can give rise to windfalls and gaming opportunities. • Transparency in compensation policy • What is really “comparable” to private sector pensions for similar jobs

OECD Patterns • In most (about two-thirds) of “old” OECD countries, public workers are covered in the national social insurance regime • In two cases, UK and Australia the “second tier” is quite different than private sector. • In two more countries – Netherlands and Finland – separate public worker regimes have parallel rules to private sector regimes. • In Netherlands, citizens’ pension also applies to public workers. • Caveat about US: increasingly all Federal government workers and most state/local government workers covered by national scheme, but not all. • About eight countries have separate pension regimes for government workers, including France, Germany and Austria.

Figure 1. Expenditure on civil-service pensions, OECD countries (per cent of GDP) Source: OECD Social Expenditures Database

Figure 2. Expenditure on civil-service pensions as a percentage of total pension spending, OECD countries Source: OECD Social Expenditures Database

Patterns outside OECD • Countries in “eastern” Europe and Russia/CIS sphere include government workers in national regime • Under pre-transition socialist ideology, everyone worked for “the state” in government or otherwise. • Exception: in (at least) Russia, special pension regime for some, but not all, Federation level workers. • In Latin America, generally in separate (and traditional) pension regimes. • Chile and Uruguay are notable exceptions • Argentina is complex with Federal and state levels. • In Africa civil servants (but not all public workers) generally are in distinct colonial-legacy defined benefit, budget financed regime. • Ghana is notable “reform” exception. Some moves toward integration or parallelism in other countries.

Patterns Outside OECD • In East Asia, South Asia, Middle East-North Africa and elsewhere, examples of both separate and integrated schemes • Factors include: • Colonial era legacy and development of “mandarin” cultures • Socialist period legacy • Style of overall social insurance regime

Central government employment, 1980s and 1990s (per cent of total population) Source: Heller and Tait (1983) and Schiavo-Campo, de Tommaso and Mukherjee (1997b)

Military, Police and Fire, etc. • In virtually all countries, military, police and fire control and those in similar occupations have special treatment though • completely separate regimes • substantial privileges within national regime • coverage in national scheme and generous supplementary schemes (e.g., US) • Long vesting periods and early retirement options for those who are not retained beyond key thresholds related to fitness, skills and leadership qualities. (Train, retain for optimal period, then maintain on pension) • Need to give credit in national regime for military service that otherwise does not generate a pension.

Reform Trends • Integration is encouraged by multilaterals and most experts. If not integration, then parallelism. • E.g., policy dialogue in some African countries • If not integration or parallelism, coordinative provisions are needed to minimize clear abuses and gaps – will always be a “third best” solution. • Some greater interest in “defined contribution” as reform strategy to put a ceiling on costs and expectations. • Question: how much to have “funded” DC vs. NDC? Or some mix of the two? • Parametric reforms

Recent reforms to civil-service pension schemes inOECD countries

Public worker pensions – can they be the same as private sector pensions? • Yes and no -- • In general, most private sector standards could, should apply, but • as noted before, not always integrated or coordinated with national social insurance, and • Issues of -- • Can pension standards be monitored/enforced through the same means of oversight? • Financing of defined benefit schemes, particularly at the highest level of government • Special issues of military, police…

Fewer issues concerning DC plans • Like private sector employers, government entities as employers make contributions under terms of plan to pension plan/fund • absent fiduciary breach, no contingent liability responsibility, provided that investment responsibility has been moved some combination of workers and plan/fund authorities who are (mostly) external to government. Otherwise, DB-type liability will linger. • Private sector service providers can be hired and overseen by plan/fund authorities. • For accounting purposes, DC moneys are usually treated as owned by workers in household sectors and not as savings in the government sector. • To avoid severe “transition costs,” one option is to provide riskless “NDC” or wage-indexed bonds. • May be desirable as an investment option for workers among a menu of investment options. See Bodie and Cowles Worry-Free Investing.

Who monitors and enforces? • One government agency sanctioning other agencies? • Example from US of non-discrimination rules in context of Federal (Workers) Thrift Plan • Federal national government regulating, supervising behaviour of interior “concurrent” sovereigns as employers • When does such regulation and supervision interfere with roles in nation’s separation of powers? • Many examples exist that demonstrate the problems of leaving supervision only to political process oversight. Some options include: • Use private sector pension oversight agencies to audit public pensions and report to the legislature. • Require same actuarial and accounting reviews as for private sector, which must be disclosed and published.

Financing defined benefit plans • In this context, “funding” has 2-3 objectives: • Diversification of risk: does that have any relevance at national government level? At state/provincial level? • Stronger case at inferior levels of government (municipalities, counties, etc.) • Reifies the current economic cost of pension promises • Reinforced by political risk concerns at the state and provincial level, even national level • But do you want national, state governments to have large ownership in private sector economy? • Similar problem in national social insurance pre-funding

Possible Solutions in DB Context • “As if” private sector fiduciary. • Lots of tensions. Example of CALPERS, etc. • Passive ownership that reflects whole economy • may entail an implicit arbitrage of government credit. • Ownership of “other” sovereign debt? • “Dependency” and “control” issues if at-home. • Invest in other countries sovereign debt? • “Proxy” funding in national sovereign debt as with US federal workers defined benefit plans • Can help reify economic costs and provide some lessening of political risk uncertainty (with respect to accrued rights)

Public Workers’ Pensions Tour de Horizon