Failure to reform will increase public pensions spending dramatically – IMF

GLOBAL - Demographic changes in Europe could increase public pensions spending by as much as 4 percentage points of GDP if governments fails to implement the right reforms, the International Monetary Fund (IMF) has warned.

In a report entitled ‘The challenge of public pension reform in advanced and emerging economies’, the IMF said old-age dependency ratios were set to double between 2010 and 2050 in developed economies due to rising longevity and falling fertility rates.

The report also warned that the impact of demographic changes could be even more pronounced in emerging countries, as fertility rates have dropped in recent years.

The IMF called on governments in both advanced and emerging economies to implement a number of reforms that have already been agreed.

“If implemented, the reforms would lower average pension spending in 2030 by 2.5 percentage points in the advanced economies, 3.5 percentage points in emerging Europe and 1 percentage point in other emerging economies,” the IMF said.

The report distinguishes developed economies - where many countries “have more room” for ambitious increases in retirement ages - and emerging economies.

In Europe, the study recommended gradually increasing statutory ages to 67 by 2030 to offset increasing demographic pressure.

It argued that incentives for early retirement should be limited, and that further reductions in replacement rates should be introduced in Austria, Greece, Italy, Norway and Portugal, where they are already high.

It also called for the development of more efficient methods for collecting contributions.

In emerging Europe, the report focused on the need for governments to rein in pensions spending and reduce replacement rates by indexing pensions to prices and increasing the pensionable base to capture lifetime earnings.

Finally, in other emerging countries, governments should encourage a larger portion of the workforce to contribute to existing pension systems, as well as implement reforms to prevent the expansion of increasing fiscal pressures.