May 24th, 2005 — A new World Bank report says profound changes in societies and the way in which people now work means countries around the world are facing a pension crunch and must urgently consider how best to conform their pension systems to the needs of the future. The report, Old-Age Income Support in the Twenty First Century: An International Perspective on Pensions and Reform says many current pension schemes are simply not well aligned with the requirements of the global economy and will not be affordable in the longer term. Robert Holzmann, Director of the Bank’s Social Protection Unit and co-author of the report, says pension reforms in most countries so far have been driven by the short term budgetary woes of keeping costly public systems afloat. “We must also pay attention to the more important longer term problems of worldwide ageing and social change, along with changes in our global economy, which so far have figured less prominently in the initial debate, “he says. The report identifies a number of social factors – such as increasing life expectancy, more women in the workforce, changing job patterns, rising divorce rates as well as rising budget deficits – that make the case for pension reform unavoidable. “The crunch is coming from the fact that most countries over-promise on what they can deliver,” says Yvonne Sin, Lead Social Protection Specialist in the Bank’s Human Development Network. “And as a result, they basically will be defaulting on their promises. “ According to the report, most pension schemes can only deliver current and future benefits at established contribution rates if they make significant adjustments in the financing or benefits. This will require a restructuring of benefit promises or cuts in other expenditure such as public spending on health or education. “If they don’t act, very often when it gets to a stage when the fiscal cost is so high, they will simply crowd out other expenditures,” Sin says. “So for example, expenditure on teachers, and spending on health care can be affected. These are all social programs that just get cut because governments cannot afford it.” Holzmann says keeping unaffordable pension systems afloat, with continual budget transfers, are often the main cause of high and rising budget deficits. These in turn, he says, can worsen a country’s macro-economic outlook during times of crisis. A reform of the pension system can reverse this pattern, creating conditions which are supportive of long term growth and stability. Social changes the drivers for change The report argues many current pension schemes don’t reflect the reality of today’s workers. One example is women. While the number of women in the workforce worldwide has risen dramatically in recent years, many pension systems still reflect traditional image of a working husband, with the woman as the child caring housewife, who needs a widow’s pension for her protection in old age. The report also says the rising divorce rate is resulting in large numbers of older people living in single households. It’s a move that further undermines traditional informal sources of old age support and renders obsolete many of the underlying assumptions for traditional benefit structures. The world’s increasing elderly population should also be viewed as a driver for pension reform. The report says the rising number of elderly pose a particular problem for the developing world – with nearly 60 percent of the elderly living in the developing countries, with the percentage expected to reach 80 percent by the year 2050. “The problem in the developing countries is that their population is getting old, before the country gets rich,” Sin says. “This is not like developed countries where they first got rich and then the population aged.” It’s a factor the report says makes it even more important to design and implement effective retirement income support for the elderly in the developing world. While a number of issues are seen as confronting many countries the report argues no one size fits all in terms of pension reform. It says countries have to choose models and a path of reform to address their own particular needs and national circumstances. But the report says the main aims of pension systems – reducing poverty and eliminating see-saw living standards as well as the broader goal of protecting people from economic and social crisis are still relevant. “Given these aims, the Bank believes the multi-pillar design is the best solution to pension reform, diversifying the sources of retirement income in a more flexible and robust system that is better able to adapt to changing conditions and be sustained over long periods ,” the report says.
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