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7th European Regional Meeting in Budapest The impact of ageing on labour markets and pension reform

Although the establishment of national pension schemes in the world's industrialized countries ranks among the great achievements of the twentieth century, and those schemes have proved effective in alleviating poverty among the elderly, adjustments are needed if current levels of well-being are to be maintained. Ageing and its impact on labour markets and pension systems is one of the main issues to be discussed at the European Regional Meeting of the ILO in Budapest on 14 to 18 February. ILO online spoke with Emmanuel Reynaud, head of the Social Security Policy and Development Branch.

Article | 17 February 2005

ILO online: Can you give us a short overview of the problems related to ageing and pension reform in the European region?

Emmanuel Reynaud: The older population is growing rapidly. Over the past 50 years, life expectancy in the region has increased from 63 to 73 years, and is expected to reach 80 years by the year 2050. Although the population in Western European countries is the oldest, that of Central and Eastern Europe and of the CIS countries is ageing faster.

In Central and Eastern European countries, where full pension coverage had been achieved and served to cushion economic shocks in the early 1990s, many countries adopted radical reforms, including measures to scale down social insurance in favour of privately managed individual savings accounts.

In the CIS, although hyperinflation reduced the real values of pensions until the mid-1990s, pension schemes were one of the most reliable means of preventing poverty in the early transition years.

In south-eastern Europe, millions have been left destitute as national pension schemes have come under financial stress because of factors including political turmoil, armed conflict, the loss of subsidized employment, heavy foreign debt and high inflation, the growth of the informal economy and non-payment of contributions.

ILO online: What can be done to avoid the threats the ageing of societies in Europe poses for pension financing?

Emmanuel Reynaud: Pension reforms can only be effective in coping with demographic pressures insofar as employment levels, especially for women and youth, rise and older people have viable options to continue working. In this respect, the reforms required across Europe are similar: stronger incentives within pension systems to delay retirement, rules which facilitate gradual retirement, incentives for workers to save for their retirement, and public information measures to improve awareness of the options available.

Extending working life is an important way of increasing employment rates. However, any measures taken for this purpose have to take into account the needs and rights of older people, especially those who have experienced poor working conditions, contributed for long periods to national pension systems or suffer from health problems. The extension of working life also requires complementary measures which provide real freedom of choice for older workers as to whether they continue working or retire.

ILO online: What can be done to overcome the obstacles which older people face in the labour market?

Emmanuel Reynaud: Stereotyped attitudes towards older workers are still the main obstacle to their employment, the role of employers being crucial in this respect. An effective solution requires stronger participation of older workers in training programmes and measures to combat age discrimination.

ILO online: Some European countries have opted for private pension provision. What can be done to raise awareness of the problems which still need to be addressed?

Emmanuel Reynaud: The emergence of private pension provision is tending to increase inequalities, and the high transition costs of shifting from public "pay-as-you-go" to private funded pension systems raises concerns about the adequacy of future pensions. One possible option – as adopted, for example, in Denmark, the Netherlands and Sweden – is the development of industry-wide schemes managed jointly by employers' and workers' organizations. These ensure a high level of coverage, since they apply to all workers in the sectors concerned.

Although the original rationale that privatization of pension provision could avert a pension crisis caused by population ageing has since been abandoned by all analysts, privatization has proven popular in many central, southern and Eastern European countries.

ILO online: What measures can be taken to address equity issues, particularly in private pension schemes, with regard to women and low-income groups?

Emmanuel Reynaud: Privatization has brought with it a range of problems which still need to be addressed. These include the financing of public pension schemes, as contributions are diverted to the privatized tier; equity issues, particularly with regard to women and low-income workers, especially those in the informal economy, who have paid few or no contributions; administrative issues, such as the maintenance of individualized records; and measures to ensure that the currently very high administrative charges are kept within reasonable limits in order not to erode savings.

The experience of Western Europe shows that, beyond the reform issue, there is a need to monitor and manage pension systems so as to guarantee their long-term viability and equity.

ILO online: What steps can be taken to improve the portability of pension rights for workers who change jobs frequently and, at the regional level, for migrant workers?

Emmanuel Reynaud: There is a strong call in many countries for the introduction of an adequate minimum pension and the improved portability of pension entitlements, in response to the consequences for future pension provision, of job mobility, non-standard forms of employment and international migration for employment. Immigration is an important potential means of improving labour force participation rates, and the financial situation of pension and other social security systems. Countries like Spain and Greece expect that immigrants will generate an important extra supply of labour. The International Labour Conference's 2004 Resolution concerning a fair deal for migrant workers in a global economy provides guidelines for the improvement of immigration policies in the context of ageing.

ILO online: What action can be taken to ensure that vital decisions on pension reform enjoy the broad support which is essential for their widespread acceptance within society?

Emmanuel Reynaud: Current social and economic transformations mean that tomorrow's retirees will have very different career profiles and family patterns from those of today. In redesigning benefits, there is a particular need to address gender issues, since women are often major losers in current pension reforms. If pension systems are to meet the needs and expectations of society and be effective in fulfilling their vocation of providing financial and social security, all these issues require strong government intervention and the development of social consensus through the close involvement of the social partners and other stakeholders.

ILO online: What can the ILO do to promote discussion and action on pension reform issues?

Emmanuel Reynaud: The need for solutions which combine employment, social protection and the promotion of workers' rights and well-being points to the key role which the ILO can play in reform processes. The ILO's tripartite approach, involving governments, workers and employers, is important in facilitating consensus-building on a viable combination of labour market and pension reforms which meet the needs and expectations of society. By providing guidance, monitoring compliance with agreed minimum standards, and promoting social dialogue, the ILO has an important role to play at the national and regional levels, particularly through its recently launched Global Campaign on Social Security and Coverage for All.

Note 1 - Managing transitions: Governance for decent work, Report of the Director-General, vol. II, Seventh European Regional Meeting, Budapest, February 2005. Chapter 5: Ageing, labour market participation and pension reform.