Office of the Superintendent of Financial Institutions
Good morning, Honourable delegates, Dear President, Dear Secretary General,
As Chairman of the ISSA Technical Commission on Statistical, Actuarial and Financial Studies, I would like to begin by thanking the German ISSA member organization, the German Federal Pension Insurance (Deutsche Rentenversicherung Bund), for graciously agreeing to host this important international conference. This conference is our Technical Commission’s main event of the 2011-13 triennium that will culminate in November 2013 with the World Social Security Forum in Doha, Quatar.
This is the 17th International Conference of Social Security Actuaries and Statisticians. The previous conference took place in Ottawa, Canada in 2009. Today we greet here more than 200 delegates from about 75 countries representing all regions of the world, as well as representatives of important international organisations such as the International Actuarial Association, the International Labour Office, the Organization for Economic Co-operation and Development, and the Inter-American Conference on Social Security.
The activities of our Technical Commission in this triennium are aimed at exploring the topic of supporting the sustainability of social security systems. This work contributes to the ISSA broader project of “Proactive and preventive approaches across all risks”. The concept of sustainability is a multifaceted one: it encompasses in particular financial, intergenerational, and political aspects. Its definition could vary from country to country, and from program to program.
A strong social security system is a vital part of a society’s overall well-being. Its goal is to protect people at the most vulnerable times of life: when one suffers a work accident, loses a job, is sick, or reaches old age. To fulfil its mandate and remain sustainable and affordable, a social security system should be based on three key principles: intergenerational equity, solidarity, and responsibility.
Intergenerational equity or fairness is one of the key elements in the sustainability discussion, and promoting such fairness should be of utmost importance for social security schemes. The aging of the world population and, in particular, increasing longevity bring the question of intergenerational equity to the forefront, especially for old-age, health care, and long-term care systems.
Assessing intergenerational fairness is more difficult than just determining the financial status of a program. How are risks shared or should be shared between the young and the old? What is the real value of benefit promises, and how do demographic and economic changes affect that value? Is the current generation ready to pay the price for these promises, and what does it expect from future generations in return?
The answers to all these questions, and to many others, should contribute to the design of mechanisms intended to protect or to restore intergenerational equity. Such policy measures may include indexing benefits or pensionable age to increases in longevity, replacing a fixed pensionable age with a flexible one, introducing actuarial benefit adjustments, or linking indexation of benefits in pay to demographic and economic environments.
Canadian and German systems include such measures. For example, the second tier of the Canadian retirement income system consists of the Canada and Québec Pension Plans, which both allow for early and late retirement with actuarially adjusted benefits, as well as for the possibility of accruing additional benefits while working after retirement. In addition, starting in July 2013, the first tier of the Canadian system, the Old Age Security Program, will also allow for late retirement with actuarially adjusted benefits. Germany possesses a very sophisticated system, which I will not even attempt to describe here in the presence of so many German experts. Let me just mention that one of the factors affecting the indexation of pension benefits in Germany is the change in the system dependency ratio, that is, the ratio of pensioners to contributors.
Unfortunately, implementation of public policies aimed at resolving intergenerational imbalance or sustainability problems caused by such imbalance has the potential to fuel further conflicts between younger and older populations. Thus, it is highly preferable to proactively implement designs that consist of predictable and gradual changes. Drastic changes to programs can also lead to the erosion of the public confidence in the intergenerational fairness of a system. The damage to the public perception could linger for a long time after any problems have been addressed and rectified. The lack of confidence in a system may translate into contribution avoidance and decline in coverage. Politically, it could also result in resistance to implementation of future reforms.
Good examples of predictable and gradual changes are planned increases in the pensionable age that provide sufficient advance notice and phase-in periods. In March 2012, the Canadian Government announced plans to increase the eligibility age for the Old Age Security Program from 65 to 67. The increase will start in April 2023 with full implementation by January 2029. These plans do not affect Canadians who are currently older than 54 years, and provide the rest of the population with a reasonable amount of time to adjust retirement planning behaviour.
While intergenerational equity is not explicitly mentioned in the conference program, this concept is at the root of all four of the conference’s themes.
The principle of solidarity refers to society protecting all individuals by collectively ensuring a basic level of assistance for low-income individuals, or, in plain words, to provide protection against poverty. The first theme of this conference addresses the relation between poverty in old age and social security. Discussions regarding the first tier of retirement systems could centre on the trade-off between sustainability and adequacy, the interaction of the first with higher retirement income tiers, extending coverage, as well as other challenges.
The 2011 OECD publication “Pensions at a Glance” states that in the OECD countries, older people tend to be slightly poorer than the general population. However, in one third of OECD countries, including both Germany and Canada, the poverty rate of older people is less than that of the general population. Does this mean that society should pay more attention to other age groups? Will future retirees be wealthier or poorer than the current ones? How will the basic tier be affected in the future by changes to the higher tiers of the retirement system?
The last question brings us to the concept of responsibility. Government, society, employers, and individuals must share the responsibility of individuals’ well-being. However, it is difficult to determine the different levels of responsibility, how they interact with each other, and once established, the optimal means of improving the adequacy of social security protection. The picture is further complicated by the need to ensure that a social security system remains financially sustainable and affordable to taxpayers and contributors.
The role of governments and society is not only to implement social security programs, but also to put in place systems and policies that promote other stakeholders’ efforts. Examples include introducing and promoting workforce safety policies, preventive health procedures, and incentives for employer-sponsored pension plans and personal savings plans.
Applying preventive and proactive strategies starts with identifying issues. Continuous and rigorous monitoring of social security systems, as well as transparency and accountability of this process are crucial for maintaining the financial health of programs, their intergenerational fairness, and public confidence. The stewards of systems have much more credibility if emerging problems are addressed in a timely and orderly manner.
As social security professionals, we play a central role in the monitoring process. We are responsible for developing assumptions and methodologies, and for determining the costs of programs. At the same time, communication is increasingly becoming an integral part of our mandate: we need to effectively convey our findings and recommendations to policymakers in order for responsible public policies to be developed.
Accordingly, we should continue to work for the public interest and to fulfil our responsibility toward society as both professionals and citizens.
This conference presents an excellent opportunity to address many challenges for social security systems. We trust that the conference will act as a platform to share knowledge, experience and research results in the field of social security. The quality and relevance of the information that will be presented by respected international social security experts will be of benefit to all of you.
This conference however cannot be successful without your active and thoughtful participation. We thus strongly encourage your input and hope that you will join us in this opportunity to share your thoughts and ideas with other social security experts from around the world.