Pension System Reforms

Anita M. Schwarz, the author of the chapter, highlights that pension systems are designed to provide an income to those individuals who suffer a loss in earnings capacity through advanced age, the experience of a disability, or the death of a wage earner in the family. While, in some cases, the systems are designed to facilitate direct transfers from the government to particular target groups, the emphasis is, in most cases, on establishing a viable mechanism whereby the individual might insure himself now against the loss of earnings in the future. 

The chapter begins with a review of mechanisms for supplying support for the elderly and disabled—namely, contributory versus noncontributory pension systems—and considers redistributive and social elements within these mechanisms.

The author notes that, while the primary goal of a pension system should be to ensure adequate, affordable, sustainable, and robust retirement incomes, most of the reforms are motivated by fiscal concerns. This arises partly because systems are rarely actuarially designed from the outset. Hence, the aging of populations, changes in the contributing labor force, poor system design, and poor administration often lead to systems that run deficits.

The chapter discusses the various types of pension system reforms and the distributional and social consequences of each type. Pension reforms may be grouped into at least four categories: parametric reforms that involve changes in the parameters of current pension systems, systemic reforms that involve the introduction of a new sort of pension system to replace or complement the existing system, regulatory reforms that involve changes in the investment regulations of funds having investible assets, and, finally, administrative reforms.

Since countries have very different systems, one should consider a few questions before analyzing the poverty and social impact of pension reforms: Are the elderly poor? What are the living arrangements of the elderly? How much income do the elderly need? What are the coverage rates of the systems? What is the fiscal status of the pension system now, and what will it be in the near future? Is the contribution rate affordable? The author also suggests that the benefit structure should be analyzed to assess the fairness of and the redistribution involved in the system. Three questions can be used as guidelines in the process, as follows: Are the benefits adequate? Are the pensions fairly provided? How redistributive is the pension system? 

An important specificity is the fact that the distributional benefits of pension reforms usually take 30 to 40 years to unfold fully, given that acquired rights must be legally and, in some cases, constitutionally respected.

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