As the United States, Europe and Asia grapple with the long-term affordability of their pensions systems, there are also growing demographic and economic pressures that are forcing both developing and developed countries to undertake urgent pension reforms.
According to the new World Bank Report, “Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform,” most public pension schemes were not designed to deliver current benefit levels when confronted with today's major demographic and economic changes. Therefore, keeping existing systems afloat will require either cutting public spending on health and education, or cutting pensions drastically for the next generations of elderly.
The Bank, which has been involved in pension reform in more than 80 countries and provided financial support for reform to more than 60 countries, believes that if problems like these are not solved, falling economic growth and greater poverty may be the end result.
Changing Societies & Employment Patterns
Over and above the economic impetus for reform are profound changes in societies and the ways in which people now work.
More women in workforce – the numbers of women in the workforce worldwide have jumped considerably in recent decades, but pension systems have not adapted to this change. Most pension systems are designed for workers with full, un-interrupted careers, which do not reflect the experience of most women, who may leave their jobs to raise children, earn lower wages, and typically outlive their husbands by several years. Lifelong marriage has also become the exception, rather than the rule in many countries. All of these trends place women at greater risk of poverty in old age unless pension systems are adapted to meet their needs.
Changing work patterns – this relatively recent development refers to the reduction in full-time salaried jobs, and the increase in part-time work, self-employment, and temporary jobs. This trend may be attributed to globalization and its competitive pressures. Whatever the reason, these workers do not fare well under many current pension schemes, which are based on a full-time employment model. Pension systems will need to be extended to provide access and portability of benefits to these 21st century workers or many will be at risk of severe poverty in old age.
Lack of pension coverage – for poor people, and workers who move in and out of formal employment, pension coverage in most developing countries is still very low. Improving coverage requires reforming expensive and unsustainable system; thinking about the introduction of social pensions if older poor people are more vulnerable than other 'at-risk' groups in the population such as children and disabled people, and the financing can be assured; and introducing, or improving, voluntary and funded systems which are better able to help informal sector workers.
Increasing numbers of elderly – the world's elderly population is growing briskly as a result of increasing life expectancy and falling fertility rates. This will result in a steadily rising average age of the population throughout the world, a rising number of elderly (age 65+), an even greater increase in the number of very elderly (age 85+), and a rising ratio of elderly (age 65+) to working-age population (age 15 - 64). This trend is most pronounced in Europe and Japan and least pronounced in Africa and the Middle East, but is a reality in nearly all countries. It is also occurring at a much faster pace in the developing than in the developed world. While nearly 60% of the elderly live in developing countries, that share is projected to increase to 80% by 2050.
This has two main implications:
First, pension systems that collect taxes from one generation to provide benefits to their parents will need to be adjusted to address the realities that elderly people live longer lives today than was anticipated when these systems were first designed.
Second, pension systems will need to be more flexible to provide incentives for older workers to delay their retirement until later in life in order to maintain a sufficient workforce to sustain growth. This makes it even more important to offer effective retirement-income support for the elderly, and to assess carefully the trade-offs, as well as synergies, between money spent to achieve growth objectives (such as education and health expenditures), and funds directed to alleviate the vulnerability to poverty of groups such as children and the disabled.
Solutions - No One Size Fits All
The past decade has underscored the importance of pension systems to the economic stability of countries and the security of their aging populations. The experience with reforms over the past ten years has also shown that no one size fits all – that countries have a number of different combinations of the elements of an effective pension system to choose from, depending on their own national circumstances. What also emerges is the continued relevance of the two main aims of pension systems: reducing poverty; eliminating the risk of rapidly falling living standards in retirement; and the broader goal of protecting vulnerable elderly people from economic and social crises.
Given these aims, the Bank proposes that the multi-pillar design is the best solution to pension reform, being much more flexible and better able to address the different risks that pension systems are designed to manage.
The multi-pillar framework is composed of a combination of five basic elements:
1- a noncontributory or “zero pillar” (in the form of a demogrant or social pension) that provides a minimal level of protection;
2- a “first-pillar” contributory system that is linked to varying degrees to earnings and seeks to replace some portion of income;
3- a mandatory “second pillar” that is essentially an individual savings account but can be constructed in a variety of ways;
4- voluntary “third-pillar” arrangements that can take many forms (individual, employer-sponsored, defined benefit, defined contribution) but are essentially flexible and discretionary in nature; and
5- informal intra-family or inter-generational sources of both financial and non-financial support to the elderly, including access to health care and housing. Depending on the preferences of individual countries as well as the level and incidence of transaction costs, a system that incorporates as many of these elements as possible, can, through diversification, deliver retirement income more effectively and efficiently. The key challenge is how to combine these different features into a comprehensive system that both, meets the local needs of each country, and charts a roadmap for feasible reform.
The World Bank Pensions Team is housed in the Social Protection Unit of the Human Development Hub and aids the Bank’s pension reform efforts through:
policy, technical and research papers as well as other knowledge products through the Pension Reform Primer and other resources,
direct technical assistance and capacity building including extensive development and support of actuarial modeling and policy analysis 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.
More women in workforce – the numbers of women in the workforce worldwide have jumped considerably in recent decades, but pension systems have not adapted to this change. Most pension systems are designed for workers with full, un-interrupted careers, which do not reflect the experience of most women, who may leave their jobs to raise children, earn lower wages, and typically outlive their husbands by several years. Lifelong marriage has also become the exception, rather than the rule in many countries. All of these trends place women at greater risk of poverty in old age unless pension systems are adapted to meet their needs. 
policy, technical and research papers as well as other knowledge products through the 
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