Pensions slashed in OECD states

State pensions have got worse in many OECD countries

The generosity of state pension systems has been slashed in many advanced countries, says the Organisation for Economic Co-operation and Development.

An OECD report says the value of compulsory pension systems will drop by an average of 22% in 16 member states.

The average pension promised has improved in only two of those countries - the UK and Hungary.

The study says pension changes that started in the 1990s mean that people will have to save more for retirement.

Raising retirement ages has been the main way of reducing pension promises.

"There is a clear underlying trend towards a reduced pension promise for today's workers compared with past generations," said the report.

Widespread changes

The OECD's report looked at the substantial changes made to the mandatory pension systems in 16 of its 30 member states.

Comparing the pensions on offer in 2004 with those it now expects to be offered in 2040, the OECD concludes that the average pension promised has been cut in 14 of those countries.

The value of future pension payouts will be reduced by between 15% and 25% in France, Germany, Italy, Japan and Sweden.

They will be slashed by more than 30% in Mexico and Portugal.

As well as introducing higher retirement ages, countries have also changed the way pensions are calculated and awarded smaller increases than in the past.

The UK has been one of only two countries where the state's pension promise has improved, because of government policy to target improvements at the lowest-paid via policies such as pension credits.

Too expensive?

The changes instituted by most OECD governments were typically prompted by fears that the pensions on offer would become too expensive and, in particular, would be too much of a drain on state taxes, because of people living longer.

"One of the main objectives of pension reforms in OECD countries has been to cut public pension expenditures and make pension systems financially sustainable in the face of population ageing," it said.

But the report reveals that the issue has not, in fact, been so clear-cut.

While people have indeed been living longer, the day-to-day cost of funding their pensions has not gone up.

Looking at the years from 1994 to 2004, it said: "Perhaps surprisingly, there is little evidence of an increased pensions contribution burden in this period."

The report suggests that in the 21 OECD countries which separate public pension contributions in their accounts, half had contribution rates that were stable at 20%, six had seen small or large increases, while five countries saw contribution rates fall.

Work longer

Among the possible explanations were that countries were financing their extra pension costs out of general taxation, that pension "reforms" had started to have an effect, or that the biggest impact of the ageing populations was yet to come.

Either way, the report says that workers in many OECD countries will have to work for longer, and save more, if they want the same sort of pensions their parents and grandparents have received.

"Today's workers will have to do more on their own to prepare for tomorrow's retirement," it says.

"In some countries, the savings effort... is substantial, even if workers save throughout their entire career."