Stable pensions during the COVID-19 pandemic

The OECD has unveiled its biennial Pensions at a Glance (Pensions at a Glance) report. According to this report, pensioners' incomes were well protected in most member states despite the severe economic impact of the pandemic. However, the consequences of the ageing of society will pose major challenges to all pension systems. The OECD advocates that automatic adjustment mechanisms should be agreed upon at national level. This will increase the transparency of the policy, create confidence in pension systems and strengthen the view with regard to long-term challenges.

OECD countries focus on strengthening the first pillar

Many OECD countries have significantly reformed their pension systems, focusing on strengthening the first pillar. These include EU countries such as Poland, Slovenia and Hungary, who have significantly increased pension benefits. Estonia, on the other hand, abolished compulsory private pension provision during the pandemic and allowed contributions to be paid out early. However, prioritising the first pillar does not mean extending the pay-as-you-go system. For example, Greece will replace the pay-as-you-go supplementary pensions with a funded defined contribution system.

According to the OECD, there is also a clear trend towards topping up pensions for people who have received a low income during their working lives. This also includes the EU countries such as Germany and Latvia.

Automatic adjustment mechanisms

Automatic adjustment mechanisms are designed to help governments achieve their medium- to long-term pension policy objectives and cope with the impact of ageing on pension provision. There is no question in the OECD's mind that the final decision will always be a political one. It has been legitimised for this. Automatic adjustment mechanisms only increase the perception of medium- to long-term objectives, whereas discretionary measures are more likely to be guided by short-term objectives. However, the experience of recent years has shown that this requires the broadest possible consensus to ensure the long-term sustainability of adaptation mechanisms. Automatic adjustment mechanisms that are abolished after each change of government will end up acting like discretionary measures.

Linking the standard retirement age to the development of long-term life expectancy

The OECD is promoting the linking of the standard age limit to longer life expectancy as a specific automatic adjustment mechanism in order to make pension systems fit for the challenge of an ageing society. The OECD suggests a ratio of 2:1 should be used here: two-thirds of the increase in life expectancy should be spent in gainful employment and one-third should be part of the retirement phase.

Such a mechanism would contribute to the long-term financial sustainability of pension systems. However, this proposal is not distribution neutral. Poor education and associated low social status or stressful working conditions have a significant impact on life expectancy. This correlation is more pronounced for men than for women. An increase in the standard retirement age will place a disproportionate burden on these groups. Therefore it would be desirable for the next publication of Pensions at a Glance in 2023 to provide a more in-depth analysis with regard to this.