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Social Security Disability Insurance (SSDI) applica-tions and benefit receipts vary greatly by state, which has led to concerns about potential inconsistencies in the way that states apply disability standards.1 An earlier brief concluded that more than 70 percent of the variation across states in SSDI application rates is explained by state health, demographic, and employment characteristics; state policies and politics explain very little.2 Another concern has been the growth in the SSDI program over time. This brief uses the same data as the earlier analysis to answer a related ques-tion: How much of the trends in SSDI application rates within states can be explained by the different factors?

Policymakers have designed Social Security to be a progressive retirement program that replaces a larger share of monthly earnings for low- and middle-income workers than for high earners. However, previous research has found that, although the Dis-ability Insurance (DI) component of Social Security is very progressive, the Old-Age and Survivors Insur-ance (OASI) component may be less progressive than intended. One reason is that high earners tend to live longer than low earners. Since Social Security pays an annuity that lasts throughout retirement, it benefits high earners with greater longevity.

This paper reviews the public pension schemes and the pension models used for the projections carried out by the Economic Policy Committee and the European Commission on age-related expenditure in 2005. The pension schemes are described as they were in force in 2005, including the effects of pension reforms enacted by mid-2005 even though the implementation of reforms would occur over a longer period of time.

The UK's pension policy framework is built around voluntary private pension saving, on top of a universal state pension. The voluntary savings pillar involves significant financial incentives to save: there is tax relief on contributions from income, as well as on capital gains in defined contribution plans.  

A period of protracted low interest rates is a feasible, even if not the most likely, scenario going forward and such a scenario would adversely affect pension funds and insurance companies. Protracted low interest rates affect investment opportunities and have a potentially significant adverse effect on life insurance companies and institutions whose liabilities consist of a fixed investment return or benefit promises, such as is the case for defined-benefit pension funds. It cannot be ruled out that the financial institutions affected engage in “gambling for redemption” in an attempt to match the level of return promised to beneficiaries when financial markets were more elevated.

The financial turmoil and the ensuing economic crisis have had a major impact on private pension assets. The current economic and financial crisis has reduced the value of assets accumulated to finance retirement by around 20-25% on average according to the latest OECD figures. However, there is large variability across countries, varying from positive but small returns in some countries to falls over 30% in Ireland and the United States (Annex).

Most countries have separate pension plan for public sector employees. The future fiscal burden of these plans can be substantial as the government usually is the largest employer, pension promises in the public sector tend to be relatively generous, and future payments have to be paid out directly from government revenues (pay-as-you-go) or by funded plans (pension funds) which tend to be underfunded.

While the immediate concern is the current financial market crisis, the key challenges for pension systems over the medium and long-term are dealing with the implications of population ageing, the design of the payout phase of pensions, in particular the type of products to channel assets accumulated in defined contribution (DC) pension plans (e.g. life annuities), as well as examining the role that financial markets can play in providing adequate private pensions.

Retirement systems and labour-market regimes are persistent institutions that affect most individuals in society, albeit in different ways. Reforming them thus entails large distributional effects, since it typically generates winners and losers. Theoretically, the electoral cost (or benefit of retirement and/or labour-market reforms should depend on the magnitude of the reform’s impact on the winners and losers, and on their relative political influence.

Occupational pension funds operate along a simple mechanism: Contributions are being paid into the fund, which are subsequently invested on the capital markets, and finally paid out in the form of pension benefits. But as the operational variables implied in this process are uncertain, this mechanism is inescapably embedded in risk. Investment returns are uncertain, and this holds true for mortality or salary trends as well. Pension funds are inevitably active risk takers.