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Pension systems are a central component of the compensation package for workers in virtually every developed nation, and nowhere are they more important than for public sector employees. The growth of public pensions has spurred a hot debate of late, since some private sector employees envy their public sector counterparts the relatively generous benefits negotiated by strong unions that traditionally represent civil servants. Also some politicians had argued that pension and health-care benefits paid to police and firefighters, schoolteachers, and other civil servants have become too expensive for the public purse, especially when benefits have been cut in the private sector And the costs of maintaining public sector pension plans have come under the microscope of late, as municipalities, states, and other governmental units facing difficult financial times and volatile capital markets realize they must cut corners. This volume takes up these and other themes pertinent to the future of public employee retirement systems around the world.

This chapter analyzes the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for civil servants in Germany, allowing for alternative portfolio mixes using a Monte Carlo framework and a Conditional Value at Risk metric. The authors identify an investment strategy for plan assets that will minimize worst-case pension costs; this turns out to be 22 percent in equities, 47 percent in bonds, and 31 percent in real estate. The authors show that moving toward a funded pension system for German civil servants can be beneficial to both taxpayers and civil servants.

This is the first of three chapters on the distinctive policy dynamics of particular areas of social provision. In their chapter on the dynamics of pension reform, Myles and Pierson stress a key feature of public pension systems: the fact that the implications of policy choices only play out over a very long period of time. Almost all pension systems are undergoing major reforms, yet choices made twenty‐five or fifty years ago profoundly shape the nature of the reform options available now. Most countries are severely constrained in their options by the accumulated commitments from decades of experience with social insurance; only where countries failed to develop large pay‐as‐you‐go pension systems at these earlier junctures has the much‐heralded alternative of introducing extensive funded arrangements proven to be a viable option. Myles and Pierson also emphasize the need to legitimate often politically painful revisions to this key element of the post‐war social contract — while there has been major change everywhere, in almost all countries this has required broad negotiations, including left‐of‐centre parties and/or labour unions.

A topic of long-standing discussion in Japan has been how to equitably merge the retirement plans for civil servants and private employees, which in the past have been managed separately. Recent legislation sought to unify social security pension schemes for all employees by extending the coverage of the Japanese Employees’ Pension Insurance Scheme, which covers private employees, to include civil servants as well. The author describes how Japanese social security pension schemes have evolved, the forces driving the merger of these plans, and what future prospects may be.

In Italy, the move from a dominant public pension pillar based on a pay-as-you-go-financed Bismarckian social insurance towards a multipillar system is an instructive example of a ‘top-down’ process pursued by governments in order to compensate for the far-reaching pension reforms in the 1990s. Change began during difficult socio-economic and financial conditions when policymakers opted to exploit the pre-existing severance-pay scheme as an ‘institutional gate’ in order to boost private supplementary pensions. However, this strategy ruled out compulsory affiliation to the new funded schemes, thereby limiting their potential coverage. The establishment of supplementary pensions has recently given rise to a ‘new politics’ putting pressure on policymakers, employers, and trade unions for regulatory harmonization between occupational funds and personal pension schemes.

This chapter focuses on the lessons private industry could learn from state and local government pensions, It begins with a brief history of public pensions. It then compares public and private pensions, and discusses benefits to employees and public defined benefit plans as financial engines. It is argued that public pension plans are in a strong position to handle the coming influx of retirees, since, unlike Social Security (mainly a pay-as-you-go program); public pensions are rather well-funded (approximately 95 percent in 2003).

This chapter examines how public pension funds can be shielded from government inference in the investment process, and reviews initiatives developed in Canada, Ireland, Japan, New Zealand, and Sweden. It highlights a number of good practices not commonly observed in most public funds. These include explicit funding targets and mechanisms to trigger action in case of deviation from objective, commercial investment policies aimed at maximising risk-adjusted returns, and professional boards selected through process that maintain distance from government officials.

This chapter explores pension reform in Germany. It begins with a brief overview of the institutional structure of the system of old age protection. Recent pension debates are discussed, and the major elements and effects of the 2001 pension reform are analysed. Pension reform has created a trend towards reducing the benefit level in social insurance. The issue of making private pensions mandatory is expected to be included in the political agenda.

This chapter examines the resilience of the two key components of the Canadian retirement income system: the Old Age Security (OAS) program and the compulsory, pay-as-you-go earnings-related scheme. The public pension scheme has both an unfunded component and a funded element, the CPP Investment Fund. The latter was adopted as a measure to improve public pension retirement security. The public system also embodies a balance between poverty reduction (the OAS program) and retirement income support (Q/CPP). The private pension system is generally considered the funded component of Canada's retirement system. It has proved successful in providing income replacement, particularly for those with higher incomes, who receive lower replacement rates from the OAS program due to the progressive nature of the public pension system.

This chapter sets out the wide range of options for pension design – funded or Pay‐As‐You‐Go, public or private, defined‐contribution or defined‐benefit – drawing on economic theory, the experience of different countries, and analysis of public and private institutional capacity constraints. Though the options vary in the form and extent of state involvement, even the most private arrangements require continuing government involvement, notably to ensure macroeconomic stability, to enforce contributions, and to ensure regulation of financial markets; and if reducing uncertainty is an objective – addressing inflation, pooling risks within a generation and across generations – the role of the state is to that extent larger.

This chapter assesses the evolution of public and occupational pension regimes in Britain and Germany from 1945 to 2009 in relation to the conservative and liberal welfare state regimes and the coordinated and liberal market economies. It argues that the liberal label has never appropriately captured the nature of British pensions, because it overlooked the strong role of the state as regulator and employer. Regarding Germany, the conservative label characterizes well the situation between 1957 and 2000. After that, the retrenchment of the statutory pension and increased state support of voluntary savings have undermined status preservation more than expected by theorists of coordinated capitalism. Both systems have therefore developed in opposing directions, Britain towards social democracy and Germany towards liberalism.

Pension entitlements—whether statutory, occupational, or private—represent a considerable source of wealth. But despite the importance of this wealth component in obtaining unbiased wealth estimates, it has not been adequately investigated in research on wealth distributions. This chapter aims to show the relevance and magnitude of public pension wealth when considered in an augmented wealth measure. For a standard measure of net worth, the chapter uses of representative micro-data from the German Socio-Economic Panel Study (SOEP). Information about public pension entitlements is mainly derived from register data from the German Social Security Administration. The two data sources are combined by statistical matching. The results for the extended wealth measure indicate a very strong impact of pension entitlements on wealth levels and wealth aggregates, on the portfolio structure, as well as on wealth inequality, all of which reflect the dominant role of the public pension system in Germany.

This chapter uses policy simulation to illustrate the scale and nature of the institutional changes made to the German and British pension systems by reforms undertaken in the first decade of the new century. The projected outcomes of the new systems for a range of hypothetical biographies in both countries are compared with those of the systems they replaced. The chapter argues that the results of these simulations are consistent neither with the predictions of the globalization thesis nor regime theory. There is no evidence of institutional convergence on the basis of a ‘race to the bottom’, but neither have the two systems remained constrained by regime logic. In fact, Britain’s reform is strongly social democratic in orientation, with Germany’s strongly liberal. In the short term these developments might generate some convergence of pension levels as German citizens spend more of their working life under the new, less generous state system while Britain’s gradually gain the benefits of recent reforms. However, when analysis focuses purely on the nature of current public/private pension institutions as revealed by their projected outcomes, the German system is shown to be more consistent with an ideal typical liberal regime than Britain’s.

This chapter discusses the guarantees offered under mandatory defined contribution (DC) plans around the world. It argues that DC guarantees must be affordable to be credible. When guarantees are contingent on investment outcomes, governments implement risk management tools such as reserves, and mandatory pension self-insurance to limit their risk exposure.

In the private sector, the expansion of the individual account paradigm will continue in the years ahead without significant controversy or impediment. In contrast, there will be increasing contention about public employees' defined benefit coverage as governmental decision-makers emulate their private sector counterparts by embracing individual account plans to shift investment, funding, and longevity risks to public employees. Equally disputatious will be the debate about efforts to expand the use of HSAs, a debate which addresses the fundamental implications of the defined contribution paradigm: the merits of individual ownership and control, the benefits of risk-pooling, the costs of adverse selection, and the distributional consequences of individual accounts. There will be no resurrection of traditional defined benefit pension plans. Even if the advocates of such plans succeed in pruning the regulatory burdens on traditional pension plans, there will be no wholesale return to the classic defined benefit paradigm.

This chapter examines the arguments for and against the reform of public service occupational pension schemes. It notes that various journalist, politicians and employer's organisations have been highly vocal in designating these as ‘unaffordable’ and ‘unfair’, contrasting them with apparently less generous schemes in the private sector. It explains and analyses arguments presenting complex debates in a clear and concise way and concludes that a holistic approach is required for pensions, including occupational pensions, state pensions and personal savings, rather than the fragmented and piecemeal changes that have characterized previous policy.

This chapter examines alternative annuity designs, and the interactions between annuity preference and publicly provided safety net support. It is shown that with a minimum pension guarantee, the variable annuity is the most preferred annuity. Inflation insured annuity products are popular among the rich and risk-averse. Non-life instruments are also popular, but are quite expensive for government revenue.

The authors investigate whether the educational and child labour effects of realized fertility uncovered by the study reported in Ch. 5 can be given a causal interpretation. They then go on to review the available evidence on the fertility effects of a number of policies (including public pensions) and variables (including wage and interest rates). In both parts of the chapter, they pay special attention to the question whether fertility is indeed endogenous as assumed in the theoretical analysis of Chs 2 and 3, and apparently confirmed by the empirical analysis of Ch. 5.

Supporters of structural reform claim that shifting from a public to a private system makes pensions financially sustainable, improves the punctuality of contribution payments, eliminates pension deficit and fiscal costs, deals with population ageing. It also promotes national savings, capital markets and returns, and protects from state and political interference. This chapter evaluates these claims. It compares contributions in both systems; evaluates the alleged improvement in compliance; examines the components of fiscal costs during the transition and beyond; contrasts initial projections of fiscal costs in private systems with reality and recent projections; evaluates financial-actuarial equilibrium in public systems. It also determines whether private systems insulate pensioners from population ageing and against state-political interference.