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Strategic options to finance pensions and healthcare in a rapidly ageing world

 

Opening remarks by Angel Gurría, OECD Secretary-General


Davos (Industry Partners Session), 30 January 2009


Ladies and Gentlemen,


I am very pleased to participate in this session which comes at a particularly crucial time for pension and healthcare policy. I would wish to congratulate the Forum for taking the initiative of this project to “define strategic options to finance pensions and heathcare in a rapidly ageing world”. The OECD is pleased to be involved in this project. I fully agree that a multistakehoder approach is essential to make financing sustainable. Several options currently considered by the WEF project deserve a particular interest in this respect. In the pensions area they include the promotion of later retirement, the encouragement of voluntary savings and improvements in education and awareness by all stakeholders, all issues on which we are working at the OECD.


The need for continued reforms in our pension and health care systems has been highlighted by the financial and economic crisis. Policy makers are facing the challenge of providing a short-term response to the crisis without losing sight of the longer-term structural reforms needed to put pension and healthcare systems on a solid footing in light of population ageing.


Let me start with the impact of the crisis on pensions. The largest impact to date has been on private pension schemes which have seen an average decline of over 20% in their investments across the OECD, 5 $ trilliions up in flames. Public pension schemes are also starting to feel the effects of rising unemployment rates, falling wages and, consequently, a decline of contribution revenues. On top of this, pensioners are hit by the decline in the value of housing assets which many retirees were hoping to draw on to support their income in old age. 


Particularly worrisome for policy is the loss of confidence in the diversified public-private model of retirement-income provision. Some commentators are saying we should rely less on private funded pensions or even return to the old single-pillar, public pay-as-you-go systems as the pension model for the future.


This would be a big mistake. A balanced mix of pension pillars, public and private, pay-as-you-go and funded, collective and individual continues to be the right approach for sustainable pension financing as our societies are ageing. But in order for this to be viable, we need pension funds to be more transparent and to be better regulated. Their governance and risk management need to be much improved. Governments and industry need to invest more time and money in financial education for people. To give just one example: People close to retirement should be protected from major losses in their savings. One way to do this is to gradually shift into safer investments as people grow older.


But we also need better public pension policies. The immediate challenge for governments is to prevent old-age poverty from rising. Most OECD countries have publicly-financed old-age safety-nets in place. But in some countries, these anti-poverty provisions are very low. Finland, Germany and Japan, for example, should consider bolstering their old-age safety-nets.


One clear danger now is that policy makers may be tempted to reduce the numbers of older unemployed by transferring them to long-term sickness or disability benefits or explicit early retirement schemes. Once established, such early retirement schemes are very difficult to close down and tend to persist over long periods. Any such measures should be avoided. They are very expensive and they give the wrong signal as the demographics in OECD countries require a long-term increase of the effective retirement age in line with rising life expectancy.


Balancing structural reform with short-term relief is also a challenge for healthcare policies. History tells us that health care spending often rises faster during recessions than during boom periods. And the higher spending levels are there to stay. In the United States, for example, total health expenditures per capita ratcheted up by more than 20% in real terms in the four years after the economic slowdown in the year 2000, and has been growing ever since.


Population ageing will increase spending further, mainly through long-term care needs of the frail elderly. In 2005, long-term care expenditure accounted for just over 1% of GDP across OECD countries. We project that such spending will reach between 2% and 4% of GDP by 2050.  Improving the efficiency of health care systems is thus imperative to accommodate future pressures.


It would be neither realistic nor desirable to expect structural health reform to happen during a deep economic crisis given the counter-cyclical effects of health expenditures. But governments should be vigilant and plan to tackle the structural problems as soon as recovery begins. Doing nothing will only increase the financial pressure and make the necessary reforms more painful as larger cuts in spending will be required.


At the OECD, we are looking forward to working with all of you to address these challenges to ensure that we come out of this crisis with more solid and sustainable pension and healthcare systems that will stand the test of time.


Thank you very much.

 

 

 

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