Reforming pensions: principles and policy choices

Abstract

Good morning everybodyIt is good, as always, to be back in Prague, and a great pleasure to take part in the award of the Professor Vencovský prize.On a personal note, it was twenty years today that I first flew to this part of the world as a member of a World Bank mission to help to reform social safety nets, so I share with many of you the twentieth anniversary feeling of this month. The backdropSocial Europe -problems and perspectives.There is much that we can talk about.I shall concentrate on an area with which I have been involved for many years -pension reform.I will start with some background matters, then set out the problems facing Europe and other countries, then look at different types of pension arrangement that offer potential solutions to those problems and then, if I have time, offer a few brief concluding thoughts.My discussion draws heavily on collaboration with Peter Diamond from MIT (Barr and Diamond, 2008, 2009, 2010), which grew out of work we did five years ago, advising the government of China on pension reform, Much of what we wrote then was not used in our report, so we thought we would turn it into a quick, short book -and failed on both counts, since it took four years till a rather long book (2008) was published -so long that Oxford University Press have just published a shorter version (2010).Though, the books were written before the economic crisis, what they say remains relevant, perhaps even more relevant in the face of economic problems.Four objectives of pension systems stand out.For the individual, pensions exist, first, to provide consumption smoothing, that is, to re-distribute from ones productive middle years to ones retired self.A second objective is insurance against risk, in the case of pensions, mainly the risk of outliving ones pension savings; thus annuities are part of the insurance objective.Public policy has additional objectives, including poverty relief, and in many countries also re-distribution.With that by way of background, let me talk about five major messages from the book.