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Pensions: Overview


CONTEXT

Nothing is more difficult to project than the future. But under all reasonable assumptions the world will substantially age in the decades to come, however measured. While aging is already well advanced in the rich and developed economies, the most dramatic aging is projected to take place in low and middle income countries. Yet, they risk becoming old before becoming rich.

Living longer and having fewer children to care for is in itself a welcome development, in particular for low and middle income countries as it renders investment in human capital more valuable and feasible. However, in order to reap these benefits requires early and long-term policy measures to make and keep the population more healthy and educated across the whole age spectrum. And the challenges of aging go well beyond. Some challenges (such as old-age income support) are well known albeit the solutions are not so straight forward; others (such as health costs, infrastructure needs, community services, labor market integration, etc of the elderly) are less well known.

Most of the old-age population worldwide has to rely on informal care. Mandatory pension systems only provide pension benefits to around 10 percent of those older than 60 years of age, and only around 25 percent of the labor force worldwide is currently contributing to a mandatory pension system. In addition to the challenge of low coverage of mandatory pension systems, most of the public pension schemes worldwide are facing administrative, institutional, and economic inefficiencies. Most of these systems were not designed to deliver current benefit levels when confronted with today's major social, demographic, and economic changes. Therefore, keeping existing systems afloat will require either cutting public spending on health, education, and other programs, or cutting pensions drastically for the next generations of elderly, their survivors, and disabled.

While population aging and related issues are receiving growing attention worldwide, approaches have so far been fragmented. There is an increasing need to review all societal institutions to prepare for an unavoidable population aging. The World Bank is in a unique position to take the intellectual leadership and collaborate with various development partners, particularly given the strongly multi-sectoral nature of the topic.

STRATEGY

International experience shows clearly that there are no easy solutions for public pension design or reform. A simple model for pension reform cannot – and should not – be uniformly applied to all countries. There are, however, clear principles that can provide useful guidance to policy makers as they struggle with crafting solutions which are appropriate in light of a particular country’s culture, political system, economy, and labor force structure. Together, these principles should be carefully considered, both when designing a new pension system as well as when reforming an existing one.

The World Bank’s general framework for pension reform urges policy makers to start with the following three steps:

  • Environment: assessment of the macro-economic, social, and demographic environment, (initial conditions and capacities),
  • Design: establishment of policy intervention objectives; selection and evaluation of the reform design architecture; establishment of the parameters of the scheme using actuarial modeling and analysis, and
  • Performance: evaluate the system/s using generally accepted principles of pension design or reform, developed from international best practices. These principles include the most relevant ones: i) accessibility (e.g. coverage), ii) adequacy, and iii) sustainability. Other principles are: i) affordability, ii) fairness, iii) predictability, iv) robustness, v) economic, and vi) administrative efficiency. These principles are intended to help policy makers rule out bad policy choices, thereby freeing them to design pension systems that are consistent with international best practices while still having considerable latitude to craft solutions that are appropriate for their country’s social preferences and country-specific conditions.

RESULTS


During the last decade, the World Bank’s pension agenda has focused much of its work on contributory pension schemes with an important emphasis on sustainability. The Bank has led efforts to reform pay-as-you-go defined benefit schemes, including innovations such as notional defined contributions and in some cases supported the introduction of new, defined contribution elements. The Bank has evaluated these reforms as they unfolded to learn from the implementation experience and to provide better advice to clients. There has also been an important emerging problem in many countries where civil service pension programs consume a disproportionate share of limited fiscal resources. For these type of ongoing challenges the World Bank has been very active in designing, improving some tools such as APEX and PROST which have served as very relevant quantitative and policy dialogue tools.

The World Bank, which has been involved in pension reform in more than 90 countries and provided financial support for reform to more than 70 countries, believes that if ageing and related challenges are not appropriately faced, falling economic growth and greater poverty may be the end result.

The World Bank Pensions Team is housed in the Social Protection Unit of the Human Development Hub and aids the Bank’s pension design and reform efforts through:

  • Policy, technical and research papers as well as other knowledge products through various resources,
  • Direct technical assistance and capacity building including extensive development and support of policy analysis and actuarial modeling using the Bank’s PROST model,
  • Training through conferences, workshops and a Flagship Pension Reform course, and financial support through a variety of lending products.



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