The interaction of pillars in multi‐pillar pension systems: A comparison of Canada, Denmark, Netherlands and Sweden

Abstract

Canada, Denmark, the Netherlands and Sweden have advanced multi‐pillar pension systems. Using micro‐simulations, this article presents a close examination of the interaction of pillars in these countries. The relative importance and the role of the different pension pillars vary from country to country, and according to age, income, gender and socio‐economic dimensions as well as between generations. A further area of investigation is the mitigation capacity of the four pension systems. On the one hand, adverse labour careers lead to lower life‐time earnings and lower private pension accruals. On the other hand, these effects are mitigated through the design of pillars and their interaction. Mitigation is important to income security and stability in retirement and to post‐retirement income distribution. However, mitigation mechanisms come at the cost of incentives. Moreover, in many countries, the generosity of public benefits is set to decrease – increasing the importance of private pensions. This will shift risk and uncertainty from employers and pension institutions to individuals. Thus, risks and uncertainties related to private pensions will become more important, raising questions about the division of responsibilities between public and private pensions, and about the potential of mitigating such risk through pillar interaction. These concerns are further reinforced by labour market changes. Although a pension system free of distortions is inconceivable, this article seeks to contribute to addressing how mitigation should be designed, and how mitigation and risk sharing should be balanced against incentives, challenges which are as much political as technical.

The challenge of pension reform in Georgia: Non‐contributory pensions and elderly poverty

“…The authors suggest that policy has to balance labour market efficiency against the various objectives of pension systems. Moreover, research by Sørensen et al () highlights that the overall design of a pension system and its pillar interactions (including basic, defined contribution and defined benefit pensions, and the use of targeted benefits in particular) play crucial roles in mitigating risks and uncertainties related to private pensions, including concerns about any labour market distortions that would result.…”

The Challenge of Pension Reform in Georgia: Non-Contributory Pensions and Elderly Poverty

“…The authors suggest that policy has to balance labour market efficiency against the various objectives of pension systems. Moreover, research by Sørensen et al (2016) highlights that the overall design of a pension system and its pillar interactions (including basic, defined contribution and defined benefit pensions, and the use of targeted Figure 13. Reducing the generosity of benefits by means testing, relative to baseline: Average benefit as % of GDP per worker, basic pension spending as % of GDP Source: Authors' calculations.…”