Worldwide, the most dramatic aging is projected to take place in low and middle-income countries. Traditional family-based care for the elderly has broken down in many developing countries without adequate formal mechanisms to take its place. For the elderly, inadequate transfers from either formal pension systems or from informal family and community transfers can severely reduce their ability to cope with illness or poor nutrition. In low-income countries, only one in nine workers contribute to a pension program. This proportion has remained stagnant for decades, affecting their ability to receive adequate pension benefits.
Public spending on pensions also tends to be regressive, being concentrated on a very small proportion of workers. Too often, the cost of paying for pensions crowds out spending on other deserving programs--- such as health or education programs-- and when payments exceed contribution revenues, cross-subsidies are required from broadly based taxes, such as a value-added tax. In middle-income countries, large gaps in pension coverage exist among lower-income, informal sector workers. This is compounded by demographic pressures straining the ability of pension systems to finance benefits. This is particularly true in transition economies in Eastern Europe and the former Soviet Union, where pension spending is frequently the largest government expenditure, as well as a major source of fiscal deficits, and accelerated aging has reduced the number of younger workers supporting older workers that need pension coverage.
The World Bank is in a unique position to take intellectual leadership and collaborate with various development partners in building strong pension systems in developing countries. The Bank has been involved in pension reform in more than 90 countries and provided financial support for reform to more than 70 countries.
International experience shows that there is no uniform model for pension reform. There are, however, clear principles that can provide useful guidance to policymakers as they develop appropriate solutions based on a country’s culture, political system, economy, and labor force structure. The World Bank’s general framework for pension reform urges policymakers 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 policymakers 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.
During the last decade, the World Bank’s work on pension reform has focused on contributory pension schemes, with an 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 also been active in designing, improving quantitative and policy dialogue tools such as APEX and PROST, which promotes well-informed policymaking, bridging the gap between quantitative and qualitative analysis of pension regimes, and addresses challenges particularly when civil service pension schemes and/or others consume a disproportionate share of limited fiscal resources. The Bank has provided capacity building and knowledge transfer on improving old-age income security to more than 100 countries.