OECD recognizes pension reform but suggests that people save more – The Economic Journal

Portuguese savings grow 0.25% (below European average) - Jornal Econômico

The Organization for Economic Co-operation and Development (OECD) said in its 2018 pension report that in the past decades, member countries have reformed their pension policies to ensure the sustainability of their systems.

The OECD emphasizes that several members have introduced automatic mechanisms that adjust the benefits of pensions to economic and demographic development, while taking steps to prevent the impoverishment of older people.

"All these reforms have made pension systems more robust" and safe, says the OECD. But, according to the organization, despite the changes, people need to increase their savings to ensure more comfortable retirement economically, mainly due to the increase in average life expectancy.

He argues that "pensions reforms need to be better communicated to make their effects clear" because "people need to understand them better to rely on pension systems." For the OECD, it is important that politicians who define pension systems reflect their objectives (combating poverty, redistribution, sustainability) and their risks (demographic, social, labor, macroeconomic and financial).

"A well-designed pension system needs automatic mechanisms that align the benefits with the economic and demographic reality. Systems must be financially sustainable, "and to do so, they must foresee adaptations to benefits, the organization says.

In addition, countries should provide financial incentives for people to save during their active life for retirement, including taxation. "The OECD encourages countries to diversify the sources of income of pensioners," by blending public or private pension income with complementary incomes.

To exploit this complementarity, policy makers need to understand how the national system addresses the objectives and risks of pensions. Only then will they be able to determine the best support for pensions, public or private.

In order to see the best combination between the public and private systems, decision-makers must also consider whether it is a mandatory or voluntary system.

"The first objective of pension systems is to ensure that the resources of the elderly are safe," says the OECD, adding that it is the responsibility of the state to protect people from falling into poverty after working life.

The OECD therefore considers that while public pension systems are well-equipped to meet the objective of preventing poverty, maintaining the standard of living of pensioners can be achieved through other supplementary schemes.

The study analyzes 42 countries with compulsory public, compulsory private and voluntary contributions. According to one of the report's graphs, in 2016 most countries had mixed systems, 17 had only mandatory public system, among which Portugal, and two (Chile and Australia) had a mandatory private system.

According to the report, workers in most OECD countries expect public pensions to be the largest source of income for their retirement. However, according to the OECD, in the last 15 years the volume of private pension funds has increased considerably in most of the member countries, contributing to the diversification of the sources of pension financing, in line with what the OECD has advocated.

For the OECD, non-contributory public pensions are the most efficient way of combating poverty and ensuring equity. Just as survivors' pensions continue to play an important role and are still necessary to maintain the standard of living of those who are widowed.

However, the OECD considers that these two types of pensions can not have a negative effect on the incentives to enter the labor market when the beneficiaries are still of working age.

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