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Discussion Papers - Pensions

Pension Reform Primer Papers

Please note that the vast majority of pension-related Social Protection Discussion Papers also comprise the Pension Reform Primer. For this reason, the complete collection of papers produced by the World Bank Pensions Team are listed below.

 

 




Denotes Pension Reform Primer Paper denotes Pension Reform Primer Paper

2013

red arrowTailoring Social Protection to Small Island Developing States: Lessons Learned from the Caribbean (1.3mb pdf)
Social Protection Discussion Paper No. 1306; Publication Date: 08/13
by Asha Williams, Timothy Cheston, Aline Coudouel and Ludovic Subran

This paper examines the role of social protection (SP) in Small Island Developing States (SIDS), given their particular structural, human resource and capacity constraints. The paper recommends a series of systemic efforts to: (i) harmonize SP systems and policies across the region to better respond to increased regional mobility; (ii) consolidate SP programs within countries to improve efficiency; (iii) foster key human capital improvements among the poor to break inter-generational transmission of poverty; (iv) improve monitoring and evaluation systems and data collection capacity to facilitate more responsive SP programs; and (v) increase partnerships with civil society and private sector. At the thematic level, the paper recommends (i) improving the responsiveness to economic and environmental shocks; (ii) improving efficiency and effectiveness of social safety net programs, in particular cash transfer programs; (iii) tailoring labor market interventions to respond to constraints faced in the SIDS context; and (iv) reforming social insurance schemes, particularly pension schemes, to address current deficiencies and ensure readiness to respond to impending ageing.

2012

red arrowPension Coverage in Latin America: Trends and Determinants
Social Protection Discussion Paper No. 1217; Publication Date: 2012/08
by Rafael Rofman and Maria Laura Oliveri

This document presents an analysis of pension coverage trends in Latin America for the past decades. Its preparation involved the collection, revision, and processing of household surveys in over 18 countries in the region, spanning a period of almost 40 years in some cases. The main goal of this document is to offer comparable data on pension coverage among the economically active population and the elderly, considering the relevance of several demographic, social, and economic variables on these coverage levels.

red arrowPrivate Pension Systems: Cross-Country Investment Performance
Social Protection Discussion Paper No. 1214; Publication Date: 2012/05
by Alberto R. Musalem and Ricardo Pasquini

This study investigates the performance of private pensions systems across countries – a topic which has yet to be adequately addressed in the literature. Specifically, this study examines the relationship between pension fund performance (as captured by gross real rates of return and the three year standard deviation of those returns) and the structure of a country’s private pension industry and the design of its pension schemes. A database covering 27 countries over the period 1990-2007 was created for this research.

red arrowGlobal Pension Systems and Their Reform: Worldwide Drivers, Trends, and Challenges
Social Protection Discussion Paper No. 1213; Publication Date: 2012/05
by Robert Holzmann

Across the world, pension systems and their reforms are in a constant state of flux driven by shifting objectives, moving reform needs, and a changing enabling environment. The ongoing worldwide financial crisis and the adjustment to an uncertain “new normal” will make future pension systems different from past ones. The objectives of this policy review paper are threefold: (i) to briefly review recent and ongoing key changes that are triggering reforms; (ii) to outline the main reform trends across pension pillars; and (iii) to identify a few areas on which the pension reform community will need to focus to make a difference.

red arrowInternational Patterns of Pension Provision II: A Worldwide Overview of Facts and Figures
Social Protection Discussion Paper No. 1211; Publication Date: 2012/06
by Montserrat Pallares-Miralles, Carolina Romero and Edward Whitehouse

This paper presents and explains cross country data for mandatory publicly and privately managed pension systems around the world. Relevant World Bank demographic projections and other indicators previously reported in “International Patterns of Pension Provision” (2000) are updated, and relationships between key indicators are highlighted.

red arrowWorld Bank Support for Pensions and Social Security
Social Protection Discussion Paper No. 1208; Publication Date: 2012/03
by Mark Dorfman and Robert Palacios

Pension and social insurance programs that prevent a substantial loss in consumption resulting from old age, disability, or death are an integral part of any social protection system. The dual objectives of such programs are to allow for the prevention of a sharp decline in income when these life-cycle events take place and protection against poverty in old age. This background paper reviews the World Bank’s conceptual framework for the analysis of pension programs and defines the major challenges facing low and middle income countries, namely, coverage, adequacy and sustainability. The paper proposes a broad, forward-looking strategy to help address these challenges.

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2011

red arrowInternational Portability of Health-Cost Coverage: Concepts and Experience
Social Protection Discussion Paper No. 1115; Publication Date: 2011/07
by Martin Werding and Stuart McLennan

In this paper, full portability of health-cost coverage is taken to mean that mobile individuals can, at a minimum, find comparable continuation of coverage under a different system and that this does not impose external costs or benefits on other members of the systems in the source and destination countries. Both of these aspects needs to be addressed in a meaningful portability framework for health systems, as lacking or incomplete portability may not only lead to significant losses in coverage for an individual who considers becoming mobile – which may impede mobility that is otherwise likely to be beneficial. It may also lead to financial losses, or windfall gains, for sources of health-cost funding which can ultimately lead to a detrimental process of risk segmentation across national health systems.

red arrowPortability of Pension, Health, and other Social Benefits: Facts, Concepts, Issues
Social Protection Discussion Paper No. 1110; Publication Date: 2011/05
by Robert Holzmann and Johannes Koettl

Portability of social benefits across professions and countries is an increasing concern for individuals and policy makers. Lacking or incomplete transfers of acquired social rights are feared to negatively impact individual labor market decisions as well as capacity to address social risks with consequences for economic and social outcomes. The paper gives a fresh and provocative look on the international perspective of the topic that has so far been dominated by social policy lawyers working within the framework of bilateral agreements; the input by economists has been very limited. It offers an analytical framework for portability analysis that suggests separating the risk pooling, (implicit or actual) pre-funding and redistributive elements in the benefit design and explores the proposed alternative approach for pensions and health care benefits. This promising approach may serve both as a substitute and complement to bi- and multilateral agreements.

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2009

red arrowEx-Ante Methods to Assess the Impact of Social Insurance Policies on Labor Supply with an Application to Brazil
Social Protection Discussion Paper No. 0929; Publication Date: 2009/12
by David A. Robalino, Eduardo Zylberstajn, Helio Zylberstajn and Luis Eduardo Afonso

This paper solves and estimates a stochastic model of optimal inter-temporal behavior to assess how changes in the design of the unemployment benefits and pension systems in Brazil could affect savings rates, the share of time that individuals spend outside of the formal sector, and retirement decisions. Dynamics depend on five main parameters: preferences regarding consumption and leisure, preferences regarding formal versus informal work, attitudes towards risks, the rate of time preference, and the distribution of an exogenous shock that affects movements in and out of the social insurance system (given individual decisions). The yearly household survey is used to create a pseudo panel by age-cohorts and estimate the joint distribution of model parameters based on a generalized version of the Gibbs sampler.

red arrowRethinking Survivor Benefits
Social Protection Discussion Paper No. 0928; Publication Date: 2009/12
by Estelle James

This paper provides a framework for analyzing the efficiency and equity of survivor benefit programs. These programs were originally designed to support families when the main wage-earner died, in an era where women rarely worked, fertility rates were high, and widows were unable to support themselves and their children. Yet, voluntary saving and insurance were often insufficient due to myopia. Mandatory survivor benefits helped to achieve lifetime consumption smoothing for the family and to prevent poverty among elderly widows—the group where old age poverty is concentrated. The question is—are these programs still needed in an era when most women work and fertility rates have fallen and, if so, how should they be designed?

red arrowHow Much Do Latin American Pension Programs Promise to Pay Back?
Social Protection Discussion Paper No. 0927; Publication Date: 2009/12
by Alvaro Forteza and Guzmán Ourens

The authors present a new database of social security indicators for eleven Latin American countries designed to assess pension schemes in terms of the payments they promise in return to contributions. Based on this data, the authors analyze inequality, insurance and incentives to work, using the replacement rates and the internal rates of return implicit in the flows of contributions and pensions.

red arrowWork Histories and Pension Entitlements in Argentina, Chile and Uruguay
Social Protection Discussion Paper No. 0926; Publication Date: 2009/12
by Alvaro Forteza, Ignacio Apella, Eduardo Fajnzylber, Carlos Grushka, Ianina Rossi and Graciela Sanroman

The authors propose alternative methods to project pension rights and implement them in Chile and Uruguay and partially in Argentina. The authors use incomplete work histories databases from the social security administrations to project entire lifetime work histories. The authors first fit linear probability and duration models of the contribution status and dynamic linear models of the income level. The authors then run Monte Carlo simulations to project work histories and compute pension rights. According to our results, significant swathes of the population would not access to fundamental pension benefits at age 65, if the current eligibility rules were strictly enforced.

red arrowIndexing Pensions
Social Protection Discussion Paper No. 0925; Publication Date: 2009/12
by John Piggott and Renuka Sane

Pension indexation should anchor the parameters of the pension system to one or more economic and demographic variables to ensure that the system is implemented in a sustainable way, while minimizing distortions affecting important economic choices. Arguing that financial sustainability, incentive compatibility and consistency across multiple government programs are critical, the authors examine the many linkages between the various parameters of pension schemes. Finally, the authors turn to the cost of the insurance dimension of indexation, and suggest that option pricing techniques could be used to price indexation guarantees, and that this approach may suggest refinements to indexation practice not thus far implemented.

red arrowPension Systems for the Informal Sector in Asia
Social Protection Discussion Paper No. 0903; Publication Date: 2009/03
edited by Landis MacKellar

This paper looks at the experiences of various Asian countries in expanding the coverage of the pension system to informal sector workers. The paper argues that given aging and growing informality, a rapid forward-looking response from governments in the region is necessary to provide protection against the risk of poverty in old age. This risk is particularly acute in the case of informal sector workers, as is the difficulty of reaching them through traditional formal-sector pension approaches. From the analysis of various case studies the paper concludes that expanding coverage to informal sector workers through mandatory systems is unlikely to work. Alternative, voluntary arrangements are need. However, because informal sector workers tend to have lower savings capacity and high discount rates, targeted subsidies might be required to encourage enrollment. The paper discusses some of the issues related to the design of these programs -- including those related to administration and the collection of contributions. In all cases, the paper emphasizes the need to resolve difficult tradeoffs between these transfers to prevent poverty during old-age and expenditures in other social programs.

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2008

red arrowInvesting for the Old Age: Pensions, Children and Savings
Social Protection Discussion Paper No. 0838; Publication Date: 2008/12
by Vincenzo Galasso, Roberta Gatti and Paola Profeta

In the last century most countries have experienced both an increase in pension spending and a decline in fertility. The authors argue that the interplay of pension generosity and development of capital markets is crucial to understand fertility decisions. Since children have traditionally represented for parents a form of retirement saving, particularly in economies with limited or non-existent capital markets, an exogenous increase of pension spending provides a saving technology alternative to children, thus relaxing financial (saving) constraints and reducing fertility. The authors build a simple two-period OLG model to show that an increase in pensions is associated with a larger decrease in fertility in countries in which individuals have less access to financial markets. Cross-country regression analysis supports the authors' result: an interaction between various measures of pension generosity and a proxy for the development of financial markets consistently enters the regressions positively and significantly, suggesting that in economies with limited financial markets, children represent a (if not the only) way for parents to save for old age, and that increases in pensions amount effectively to relaxing these constraints.

Denotes Pension Reform Primer Paper The Performance of Social Pensions in India: The Case of Rajasthan (310kb pdf)
Social Protection Discussion Paper No. 0834; Publication Date: 2008/07
by Puja Vasudeva Dutta

The Government of India has recently announced a dramatic expansion of social pension schemes both in terms of coverage and benefit levels. Yet relatively little is known about how these programs are administered or how well they achieve their objectives. This paper assesses the performance of a social pension scheme in the Indian state of Rajasthan. In particular, the authors review the experience with respect to program awareness, coverage, targeting and leakage as well as delivery mechanisms. The overall assessment is positive and holds broader lessons for social assistance in India. Thus, transaction costs once pensions are sanctioned are low, disbursements are largely as per schedule, leakage in the form of shortfalls in benefits is generally low and satisfaction levels with the social pension scheme are high. At the same time there are clear areas for improvement on both the policy and administration side. There is evidence of under-coverage and high transaction costs associated with the application process. Though targeting is generally progressive, especially for old age and widow pensions though less so for disability pensions, targeting is far from perfect and the eligibility criteria are not strictly enforced. There is a strong case for relaxing, rationalizing and clarifying some of the existing criteria. On the administration front, several basic issues relating to implementation need to be addressed, particularly with respect to transaction costs in the sanction of pensions, wide inter-district variations in performance within the state and inadequate record-keeping and monitoring.

Denotes Pension Reform Primer Paper Reforming the Pension Reforms: The Recent Initiatives and Actions on Pensions in Argentina and Chile
Social Protection Discussion Paper No. 0831; Publication Date: 2008/05
by Rafael Rofman, Eduardo Fajnzylber and German Herrera

This paper describes the recent reforms of pension policies adopted by Argentina and Chile. The structural reforms in the 1980s and 90s were targeted on improving the long term fiscal sustainability of the system and their institutional design, while transferring part of the economic and social risks from the State to participants. However, in recent years authorities in both countries coincided on identifying insufficient coverage among the elderly and adequacy of benefits as the most critical problems. As a result of differences in political economy and institutional constraints, responses were different. In Chile, a long and participatory process resulted in a large reform that focuses on impacts on the medium term, through a carefully calibrated adjustment. In Argentina, instead, reforms were adopted through a large number of successive normative corrections, with little public debate about their implications, and immediate impacts on coverage and fiscal demands.

Denotes Pension Reform Primer Paper Work History and the Access to Contributory Pensions in Uruguay: Some Facts and Policy Options (273kb pdf)
Social Protection Discussion Paper No. 0829; Publication Date: 2008/05
by Marisa Bucheli, Alvaro Forteza and Ianina Rossi

Incomplete and highly fragmented work histories threaten to leave many contributors of the pension schemes in Latin America without the minimum pension guarantee or even without access to the ordinary pension. The authors propose a methodology to assess this risk, identify vulnerable groups and study potential determinants of the history of contributions using information from the work history records of the social security institutions. The authors apply this methodology to the largest social security institution of Uruguay, the Banco de Previsión Social, and show that the majority of contributors to this institution might not comply with the minimum number of years of contribution that is currently required to access an ordinary pension when they reach the retirement age.

Denotes Pension Reform Primer Paper A Theory of Contribution Density and Implications for Pension Design (300kb pdf)
Social Protection Discussion Paper No. 0828; Publication Date: 2008/07
by Salvador Valdés-Prieto

The adequacy of contributory pensions for the middle classes depends on density of contribution. Density can be far below 100% because the State is unable or unwilling to impose the mandate to contribute on all jobs, especially on poor workers such as many in self-employment and small firms. The paper presents a model where individuals choose whether to bundle saving for old age in a covered job or to save independently while choosing an uncovered job. The determinants of the effective rate of return offered by the contributory pension plan include the earnings differential. This return is then compared with the returns offered by pure saving in the financial market, to determine the equilibrium density of contribution. The paper also applies the model to assess two standard designs for noncontributory subsidies for the old poor. It finds that these standard designs crowd out contributory pensions for the middle classes by reducing density. The paper also considers two second-generation designs for noncontributory subsidies and other approaches to raise density. This model also allows optimization of the combined “multipillar” structure, where participants get noncontributory pensions and also contributory pensions based on both mandates and fiscal incentives.

Denotes Pension Reform Primer Paper On the Financial Sustainability of Earnings-Related Pension Schemes With “Pay-As-You-Go” Financing (697kb pdf)
Social Protection Discussion Paper No. 0827; Publication Date: 2008/07
by David A. Robalino and András Bodor

In this paper the authors review the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. The authors show that current proxies for the sustainable rate, including the Swedish “gyroscope”, are not stable and propose an alternative measure that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector macroeconomic model that embeds a notional account pension system the authors test how the different proxies perform in the presence of various macroeconomic and demographic shocks. The authors find that the new formula proposed in this paper is the most stable. It avoids the accumulation of assets without bound (which penalizes workers) while always ensuring a positive buffer fund.

Denotes Pension Reform Primer Paper An Ex-Ante Evaluation of the Impact of Social Insurance Policies on Labor Supply in Brazil: The Case for Explicit over Implicit Redistribution
Social Protection Discussion Paper No. 0826; Publication Date: 2008/07
by David A. Robalino, Eduardo Zylberstajn, Helio Zylberstajn and Luis Eduardo Afonso

This paper solves and estimates a stochastic model of optimal inter-temporal behavior to assess how changes in the design of the income protection and pension systems in Brazil could affect savings rates, the share of time that individuals spend outside of the formal sector, and retirement decisions. Dynamics depend on five main parameters: preferences regarding consumption and leisure, preferences regarding formal vs. informal work,attitudes towards risks, the rate of time preference, and the distributions of two exogenous shocks that affect movements in and out of the social security system (independently of individual decisions).

Denotes Pension Reform Primer Paper The Portability of Pension Rights: General Principals and the Caribbean Case
Social Protection Discussion Paper No. 0825; Publication Date: 2008/05
by Alvaro Forteza

The portability of pension rights is an increasingly important issue in the Caribbean. The large and increasing flows of migrant workers, including both permanent and temporary migrants, the small size of the domestic economies and the process of regional integration and economic openness call for effective means to make pensions portable. This document presents a select survey of the literature on pension portability and reviews the progress made by the Caribbean countries as well as some remaining challenges in the light of the international experience.

Denotes Pension Reform Primer Paper Pension Systems and Reform Conceptual Framework
Social Protection Discussion Paper No. 0824; Publication Date: 2008/06
by Robert Holzmann, Richard Paul Hinz and Mark Dorfman

The World Bank’s conceptual framework to assess pension systems and reform options evaluates initial conditions and the capacity to improve the enabling environment, then focuses on how best to work within these to achieve the core objectives of pension systems - protection against the risk of poverty in old age and smoothing consumption from one’s work life into retirement. The Bank applies a multi-pillared approach towards pension system modalities to address the needs of target populations including: (i) a non-contributory “zero pillar” extending some level of old-age income security to all of the elderly; (ii) an appropriately sized mandatory “first pillar” with the objective of replacing some portion of lifetime pre-retirement income through contributions linked to earnings; (iii) a funded mandatory defined-contribution “second pillar” that typically provides privately-managed individual savings accounts; (iv) a funded voluntary “third-pillar;” and (v) a non-financial “fourth pillar.” The primary evaluation criteria are the ability of the system to maintain adequacy, affordability, sustainability, equity, predictability and robustness. The secondary evaluation criteria are the system’s capacity to: minimize labor market distortions; contribute to savings mobilization; and contribute to financial market development. Because pension benefits are claims against future economic output, it is essential that over time pension systems contribute to growth and output to support the promised benefits. Going forward, the Bank is focusing on strengthening its support in: (a) establishing a clearer results framework to assess pension systems and reforms; (b) enhancing knowledge management, including research and learning; and (c) improving implementation capacity.

red arrowPension Lending and Analytical Work at the World Bank: FY2002-2007
Social Protection Discussion Paper No. 0811; Publication Date: 2008/05
by Richard Hinz, Melike Egelmelzer and Sergei Biletsky

This paper presents an overview of the World Bank’s lending and knowledge building activities that have improved pension systems in client countries during the past two decades. The objectives of this report are: 1) to describe the policy framework that has guided the Bank’s work on pension related issues and 2) to present relevant information about the nature and extent of the Bank’s lending and policy advisory work in this area and 3) to discuss some of the results that have been achieved through this work as well as future policy directions.

Denotes Pension Reform Primer Paper Disability Insurance with Pre-funding and Private Participation: The Chilean Model
Social Protection Discussion Paper No. 0719; Publication Date: 2008/01
by Estelle James, Augusto Iglesias and Alejandra Cox Edwards

The disability insurance system in Chile is much less well-known than the pension part, but it is equally innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely pre-funded - through the accumulation in the retirement account and later through an additional payment made when the person becomes permanently disabled, sufficient to cover a lifetime defined benefit annuity; and 2) the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in controlling costs. Survivors’ insurance is handled in the same way, through a combined D&S fee. the authors argue that pre-funding will raise disability fees in the early years of a new system as funds are built up but reduce them in the long run as benefits are covered out of accumulated funds. the authors further hypothesize that the participation of private pension funds in the assessment procedure will keep system costs low, by cutting the incidence of successful disability claims. Finally, the authors expect that these incentives will also lead to cost-shifting - to other AFP’s by selection and to the public treasury via the minimum pension guarantee (MPG). Using simulations based on a special data set that was provided to us by the Association of AFPs and applying the Cox proportional hazard model to a retrospective sample of new and old system affiliates (ESP 2002), the authors conclude that these hypotheses are broadly consistent with observed behavior.

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2007

red arrowThe Life-Course Perspective and Social Policies: An Issues Note
Social Protection Discussion Paper No. 0719; Publication Date: 2007/11
by A.L. Bovenberg

A number of trends are changing the nature of social risks and increase the importance of human capital, adaptability and flexibility. This paper discusses the usefulness of a life-course perspective in developing proactive social policies that better fit the changing life cycles of individuals who combine formal work with other activities on transitional labor markets. It pays special attention to the accumulation and maintenance of human capital over the life course and stresses that reconciliation of work and family goes beyond child-care facilities and parental leave, and involves the entire life course. In particular, longer and deeper involvement in paid employment allows people to exploit their longer life to reconcile the two ambitions of, first, investing in the next generation as a parent and, second, pursuing a fulfilling career in paid work in which one keeps learning. Greater flexibility of working time over the life course requires more individual responsibility for financing leave. Moreover, rather than shielding older insiders through employment protection, labor-market institutions should enable parents of young children to easily enter and remain in the labor market. Finally, more activating social assistance and in-work benefits should replace the passive income support for breadwinners that results in high minimum-wage floors.

Denotes Pension Reform Primer Paper The Kosovo Pension Reform: Achievements and Lessons
Social Protection Discussion Paper No. 0707; Publication Date: 2007/04
by John Gubbels, David Snelbecker and Lena Zezulin

This paper tells the story of the Kosovo reform and draws policy and implementation lessons from the experience. The paper discusses policy issues and implementation experience in great detail, to serve as a resource for others interested in various aspects of the Kosovo reform. Readers who want to understand an overview of the reform and key lessons drawn from the experience may wish to turn immediately to: Section II.2, which presents an overview of the three pillars; Sections III.7 and IV.18, which present the specific challenges confronted in implementing Pillars I and II, respectively; and Section VI, which summarizes the lessons learned about policy and implementation issues from the Kosovo reform experience.

red arrowAging and Demographic Change in European Societies: Main Trends and Alternative Policy Options
Social Protection Discussion Paper No. 0703; Publication Date: 2007/03
by Rainer Muenz

This paper gives an overview on current demographic trends and projected population change in Europe and neighboring regions. The main focus of the analysis is on Western and Central Europe. Today this world region has a total population of 500 million. Available forecasts until the year 2050 project a decline of the population at working age, a subsequent decline of the (native) work force and a parallel increase in the number of retired people. The paper discusses policy options by demonstrating the impact of possible changes in labor force participation, higher retirement age and pro-active recruitment of migrant labor on population size and future labor force.

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2006

red arrowAn Assessment of Reform Options for the Public Service Pension Fund in Uganda
World Bank Policy Research Working Paper 4091, 2006/12
by Tatyana Bogomolova, Gregorio Impavido and Montserrat Pallares-Miralles

This paper analyzes the future liabilities that the Ugandan Public Service Pensions Fund might accumulate under the provisions of CAP 286, unless it is reformed. It then discusses alternative reform options that can be used as input in designing an educated homegrown reform of the fund. The paper supports a hybrid (two-pillar) reform option composed by a small defined benefit scheme and a complementary defined contribution scheme, instead of a pure defined contribution (monopillar) reform option discussed by policymakers in the country. The main reason for this is related to the fact that hybrid and pure defined contribution reforms will have the same impact on reducing pension expenditure (for same grandfathering rules and surplus in the first pillar). In addition, everything else being equal, the hybrid reform is likely to produce higher average replacement rates due to the redistributive and pooling properties of the small DB pillar.

red arrowPension Systems in Latin America: Concepts and Measurements of Coverage
red arrowAlso available in Spanish - This version is dated 2006/11
Social Protection Discussion Paper No. 0616; Publication Date: 2008/10
by Rafael Rofman and Leonardo Lucchetti

This paper presents a new stage in the efforts by the authors to produce a reliable estimation of coverage indicators in the region. This project started in 2004-05 with the analysis of a coverage data for a smaller group of countries around 2002 (Rofman and Carranza, 2005), as was significantly revised and expanded, to include time series beginning in the mid 1990s in 2006-07. This version presents a new expansion in the time series of indicators, going now from 1990 to 2006, and included additional countries in the region. Of course, the data still present gaps, and comparability problems originated on differences in the sources are still present, as explained in the methodological annex.

red arrowThe Relative Merits of Skilled and Unskilled Migration, Temporary and Permanent Labor Migration, and Portability of Social Security Benefits
Social Protection Discussion Paper No. 0614; Publication Date: 2006/11
by Johannes Koettl under guidance of and with input from Robert Holzmann and Stefano Scarpetta

In March 2006, the G-20 established a study group on labor mobility and demographics. The World Bank’s Social Protection and Labor unit (HDNSP) was asked to provide an issues paper on the relative merits of skilled and unskilled migration, temporary and permanent labor migration, and portability of social security benefits. The objective of this paper is: (i) to highlight the relative merits of skilled and unskilled migration for both source and destination countries; (ii) to highlight the relative merits of temporary and permanent migration for source and destination countries; and (iii) to highlight the costs and benefits of enhanced portability of social security benefits and its impact on incentives for migrants and migration outcomes.

Denotes Pension Reform Primer Paper Comparing Individual Retirement Accounts in Asia: Singapore, Thailand, Hong Kong and PRC
Social Protection Discussion Paper No. 0609; Publication Date: 2006/09
by Yasue Pai

This paper compares the different approaches of Singapore, Thailand, Hong Kong, and China with respect to how they manage their respective defined contribution, individual retirement account systems. The four cases illustrate important differences in terms of some of the key issues in design of DC schemes; the role of government versus private sector, investment policy and individual choice, among others. They also provide a useful contrast in terms of initial conditions.

Denotes Pension Reform Primer Paper Pension System Reforms
Pension System Reforms
Social Protection Discussion Paper No. 0608; Publication Date: 2006/09
by Anita Schwarz

In typical pension systems, individuals are asked to make contributions and based on the number of contributions made and the level of those contributions, a pension is awarded. Contributions from workers generally finance these pensions. Since higher income individuals tend to make more frequent contributions due to a more stable work history and higher contributions based on their higher wages, pension expenditures are naturally skewed toward those who paid for them, the higher income individuals. The normal tools for poverty and social impact analysis are often not applicable given the contributory nature of the systems. The paper looks at these issues, provides a framework in which to view pension reforms, and provides some pension-specific tools which do allow a sensible poverty and social impact analysis to take place.

Denotes Pension Reform Primer Paper Civil-service Pension Schemes Around the World (430kb pdf)
Social Protection Discussion Paper No. 0602; Publication Date: 2006/05
by Robert Palacios and Edward Whitehouse

There are separate pension schemes for civil servants in about half of the world’s countries, including some of the largest developing economies, such as Brazil, China and India. In the higher-income, OECD countries, spending on pensions for public-sector workers makes up one quarter of total pension spending. In less developed countries, this proportion is usually higher. Yet, very little has been written on the design and reform of civil-service pension plans, especially when compared with the voluminous literature on national pension programs.

This paper compares civil service pension schemes across countries in terms of benefit provision and cost. The authors find that in many developing countries, these expenditures are a greater fiscal burden than in higher income countries where the tax base is larger. The paper also compares schemes within the same country covering private sector workers. Finally, the authors review key policy issues related to pension schemes covering civil servants as well as other public sector workers. In particular, the authors find that there is little justification for maintaining parallel schemes in the long run.

Denotes Pension Reform Primer Paper Social Pensions Part I: Their Role in the Overall Pension System
Social Protection Discussion Paper No. 0601; Publication Date: 2006/05
by Robert Palacios and Oleksiy Sluchynsky

Cash transfers for the elderly with little or no link to previous contribution or work history are employed in many countries to provide income support for the elderly. In the context of the larger debate over pension reform, some argue that these ‘social pensions’ are an effective way to deal with chronically low coverage of contributory schemes and to alleviate poverty among the elderly. This paper reviews the global experience with social pensions. The authors find that coverage and cost of these programs varies widely and that the appropriate role for social pensions should take into account several country-specific conditions. The extent of coverage of the contributory scheme, the extent of other social assistance programs and the relative poverty status of the elderly are among the factors that should be considered. Design and implementation issues will be reviewed in Part II.

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2005

Denotes Pension Reform Primer Paper Japan’s Pension Reform (666kb pdf)
Social Protection Discussion Paper No. 0541; Publication Date: 2005/12
by Junichi Sakamoto

Rapid population ageing has led to repeated adjustments to the parameters of Japan’s public pension scheme over the last decade all aimed at achieving long run financial balance. The most recent attempt, describe in this paper, introduces an adjustment mechanism that links future benefit levels to the underlying determinants of the scheme’s finances. This mechanism is similar to those recently introduced in Germany and, to a lesser extent, in Sweden and fundamentally alters the concept of the ‘defined benefit’. Changes to how pension reserves are invested are also described. Finally, the benefit reductions in the public scheme and recent regulatory changes suggest an increased future role for complementary private provision.

Denotes Pension Reform Primer Paper The New Pensions in Kazakhstan: Challenges in Making the Transition
Social Protection Discussion Paper No. 0537; Publication Date: 2005/09
by Richard P. Hinz, Asta Zviniene and Anna-Marie Vilamovska

In June of 1997 Kazakhstan embarked on a dramatic reform of its pension system, replacing the inherited pay as you go regime with one based entirely on fully funded individual accounts. The paper provides projections of the effects of this reform on income replacement rates and considers some possible adjustments to the system design, including those enacted in early 2005, that could address the projected outcomes of the reform. The initial reform which did not include any minimum pension guarantee is projected to result in a significant reduction in the individual income replacement rates derived from the pension system, especially for women. When the reform was mature and the old system fully phased out, women are projected to have received pensions at level of less than 15 percent of their pre-retirement earnings. Various potential adjustments to the reform, including the recent introduction of a citizens pension or "demogrant", are found to have the capacity to significantly raise these income replacement rates. The fiscal costs of alternatives are found to vary considerably due significantly to the degree to which they would target expenditures to lower income groups. The analysis of the original reform design and possible adjustments provides some useful lessons about the design of individual account systems in transition economies.

Denotes Pension Reform Primer Paper Pension Supervision: Understanding International Practice and Country Context
Social Protection Discussion Paper No. 0524; Publication Date: 2005/05
by Richard P. Hinz and Anca Mataoanu

This paper proposes an approach to classifying and measuring the primary elements of private pension supervision and undertakes an evaluation using a representative set of countries. The analysis considers how supervision methods and style relate to the basic design of pension systems and the broader environment in which they operate. Supervisory systems are shown to include six main elements, with considerable variation among systems in the scope and intensity of activities within each element. The analysis concludes that there are discernible relationships between supervisory methods and the context in which they are applied. The level of economic development, depth of capital markets, underlying legal framework presence of mandates, and number of funds supervised are found to be associated with depth and intensity of supervision activities. These findings support the principle that the organization and management of private pension supervision is significantly derived from the context and environment in which these systems operate.

Denotes Pension Reform Primer Paper Social Security Coverage in Latin America
Social Protection Discussion Paper No. 0523; Publication Date: 2005/05
by Rafael Rofman

The debate on social security coverage has been complicated by a lack of consistent quantitative information that would allow for rigorous comparisons of different countries and different time spans. Although many recently published articles and opinions include statistics, their sources and calculations methodology are not always clear. For that reason, the publication of coverage information in a significant number of the region’s countries, calculated simultaneously and based on similar data, makes an important contribution to clarifying the debate and developing specific proposals for problem solving.

red arrowAging and Poverty in Africa and the Role of Social Pensions
Social Protection Discussion Paper No. 0521; Publication Date: 2005/05
by Nanak Kakwani and Kalanidhi Subbarao (online only)

In many low income African countries, three factors are placing an undue burden on the elderly. First, the burden on the elderly has enormously increased with the increase in mortality of prime age adults due to HIV AIDS pandemic and regional conflicts. Second, the traditional safety net of the extended family has become ineffective and unreliable for the elderly. Third, in a few countries, the elderly are called upon to shoulder the responsibility of the family as they became the principal breadwinners and caregivers for young children. While a number of studies have examined the welfare consequences of these developments on children, few studies have systematically analyzed the poverty situation among the elderly (relative to other groups) in low income countries Africa, and the role of social pensions. This study aims to fill this gap.

red arrowPortability Regimes of Pension and Health Care Benefits for International Migrants: An Analysis of Issues and Good Practices. Also available in French.
Social Protection Discussion Paper No. 0519; Publication Date: 2005/05
by Robert Holzmann, Johannes Koettl, and Taras Chernetsky

The paper provides a first investigation into the portability of pension and health care benefits for international migrants. It is based on available literature and newly minted data, but more importantly on selective case studies from main migrant-sending and receiving countries. While exploratory, the paper achieves a better understanding of the realities on the ground and is able to distill key issues as well as identify good and best practices. The main conclusions include the following: First, only around 20 percent of migrants worldwide work in host countries where full portability of pension benefits, but not necessarily of health care benefits, to their home countries is ensured. Second, bilateral agreements are seemingly the current best practice to ensure portability for pension and health care benefits, although for the latter this is not always the case. Third, more actuarial-type structures should help to enhance portability. This is, in principle, straightforward for pensions and a defined contribution-type design. It is much more complicated for health care benefits. Last but not least, for improved benefit design and implementation, the information base needs to be broadened, including through more country case studies and tracer studies of migrants.

Denotes Pension Reform Primer Paper Pension Reform in El Salvador
Social Protection Discussion Paper No. 0507; Publication Date: 2005/04
by Rodrigo Acuña

El Salvador implemented a systemic pension reform in 1998. The publicly-managed, defined benefit and unfunded pension schemes for formal sector workers were replaced by a privately-managed scheme with individual accounts. The experience during the first five years of the reform has been marred by problems related to the valuation of accrued rights in the old scheme and government intervention. There are also growing concerns about market concentration in a country where only two pension fund managers compete in a system which is mandatory for all formal sector workers. The case of El Salvador raises the question as to whether a small country with limited governance capacity can succeed with this reform model.

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2004

Denotes Pension Reform Primer Paper Safety Nets for the Elderly in Poor Countries: The Case of Nepal (311kb pdf)
Publication Date: 2004/05, DRAFT - PLEASE DO NOT CITE
by Robert J. Palacios and S. Irudaya Rajan

Cash transfer programs specifically targeted toward the elderly can be divided into demogrant and means-tested schemes. The latter apply some test of need while demogrants are paid to all citizens that reach a particular age. While means-tested programs are fairly common, there are only about a dozen examples of the demogrant or universal flat pensions. Nepal is one of the few low income countries and the only South Asian country with a demogrant. In principle, it pays a modest pension to all Nepalese citizens age 75 and over. There is also a means-tested pension for widows over age 60. This paper analyzes the safety net for the elderly in Nepal through its first nine years of operation at the national, regional and local levels. The preliminary conclusions are that (i) current and projected spending is modest due to low benefits and a high eligibility age; (ii) while around three-fourths of the eligible population receives the benefit, there are significant differences across Nepal's 75 districts; (iii) the results of a special (albeit unrepresentative) survey suggest that transaction costs and corruption are minimal and (iv) the reliance on Village Development Committees (VDCs) to administer the scheme may allow for significant variation in the efficacy of implementation. The future role of the demogrant should be determined as part of a coherent overall pension policy.

red arrowToward a Reformed and Coordinated Pension System in Europe: Rationale and Potential Structure
Social Protection Discussion Paper No. 0407; Publication Date: 2004/04
by Robert Holzmann

The need for a rapid and comprehensive reform of the pension systems in most current and future member countries of the European Union is increasingly acknowledged by individuals and politicians. National efforts can now draw support on intensified EU cooperation which is based on the Open Method for Coordination. Yet, this method takes the diversity of European pension design as a given, and much of the reform debate is still limited to fiscal issues at national levels. This paper (i) reviews the reform needs of the pension systems for fiscal, economic and social reasons; (ii) makes the case for a move toward a more coordinated pension system in Europe; and (iii) sketches how such a system may look like and come about. The central claim of the paper is that a multi-pillar system, with a non-financial (or notional) defined contribution (NDC) system at its core, and coordinated supplementary funded pensions and social pensions at its wings is an ideal approach to deal with diverse fiscal and social reform needs. The approach would also introduce a harmonized structure while allowing for country-specific preferences with regard to coverage and contribution rate. Such a reform approach may lead to a Pan-European reform movement as a number of countries did or plan to introduce NDCs, and others may easily convert their point system into an NDC structure.

Denotes Pension Reform Primer Paper Implicit Pension Debt: Issues, Measurement and Scope in International Perspective
Social Protection Discussion Paper No. 0403; Publication Date: 2004/03
by Robert Holzmann, Robert Palacios and Asta Zviniene

This paper argues that it is important to take into account unfunded public pension liabilities as part of an assessment of the overall fiscal situation, including the fiscal positions of pension schemes pre and post reforms. It examines the concept of the implicit pension debt (IPD) and presents estimates for 35 low and middle income countries based on a consistent methodology and assumptions. The policy conclusions stress the need for standardized international reporting of this indicator.

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2003

Denotes Pension Reform Primer Paper Pension Reform in the Dominican Republic
Social Protection Discussion Paper No. 0326; Publication Date: 2003/12
by Robert J. Palacios

Arguably, the most important public policy initiative under way today in the Dominican Republic is the reform of its social security programs. The reform is taking place in the context of an economic crisis that will make a complex implementation process even more difficult in the first few years. In the longer run, the complete overhaul of the health and pension systems will have a major impact beyond social policy. It will affect labor markets, fiscal policy and even financial markets. In terms of the country's economic development, much is at stake. This paper describes the systemic pension reform introduced by legislation in 2001 but implemented only in mid-2003.

Denotes Pension Reform Primer Paper Disability Pensions and Social Security Reform: Analysis of the Latin American Experience
Social Protection Discussion Paper No. 0325; Publication Date: 2003/12
by Carlos O. Grushka and Gustavo Demarco

This paper describes the disability pension arrangements prevailing in ten Latin American countries that reformed their pension systems. The analysis is limited to the topic of disability pensions, without attempting to evaluate other critical aspects such as the available infrastructure: handicapped access generally (ramps, blind cues), medical and nursing support, home care, and so on. The relative significance of disability pensions is highly dependant on these factors and, however, they are really limited in most countries of Latin America.

Denotes Pension Reform Primer Paper Governance of Public Pension Funds: New Zealand Superannuation Fund (281kb pdf)
Publication Date: 2003/05
by Brian McCulloch and Jane Frances

After briefly reviewing the context behind the policy and the policy objective, this paper examines the resulting key design elements of the governance framework for the New Zealand Superannuation Fund that attend to each element of that objective: clearly defining the Fund, placing an appropriate level of independence around the governing body, providing explicit legislated commercial investment objectives, and establishing a robust accountability framework. Finally, the paper briefly reviews the experience of implementation to date, and also summarizes the arrangements surrounding the governance of other portfolios of financial assets owned by the Crown in New Zealand.

Denotes Pension Reform Primer Paper Ageing and Pensions in the Euro Area: Survey and Projection Results
Social Protection Discussion Paper No. 0307; Publication Date: 2003/03
by P. C. Rother, M. Catenaro and G. Schwab

Population ageing will impose a significant burden on European fiscal balances, in particular through pay-as-you-go pension systems. This study presents an independent estimate of this burden for the euro area and quantifies the impact of two reform scenarios. Based on widely used but optimistic assumptions, the present value of future pension deficits through 2050 is estimated at 51% of GDP, adding to the current average explicit debt stock of around 67% of GDP. In this calculation, the deficits currently incurred by many pension systems as revenues fall short of expenditures are not included. Viable parametric reforms represent no durable solution to alleviate the burden sufficiently, as they can balance pension systems at best temporarily. A comprehensive reform, including reforms of current systems and a move towards partial funding, is found to ensure permanent financial viability of the public pension system.

Denotes Pension Reform Primer Paper Pension Reform in Croatia
Social Protection Discussion Paper No. 0304; Publication Date: 2003/02
by Zoran Anusic, Philip O'Keefe and Sanja Madzarevic-Sujster

Croatia's transition toward independence and the market economy in the 1990s exacerbated problems in the PAYG DB system and ultimately led to its financial collapse. Although a comprehensive three-pillar reform was initiated in late 1995, implementation of the reform only began in 1998 with an overhaul of PAYG parameters, including shifting to a German-style points system. Introduction of the mandatory and voluntary funded pillars was announced in 1998 and implemented in 2002. The new system includes a privately-managed individual account scheme with a contribution rate of 5 percent in addition to a downsized pay-as-you-go, defined benefit component. This paper describes the design of the new system and highlights areas where further refinements are needed.

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2002

Denotes Pension Reform Primer Paper Managing Public Pension Reserves Part II: Lessons from Five Recent OECD Initiatives
Social Protection Discussion Paper No. 0219; Publication Date: 2002/07
by Robert J. Palacios

A large number of public pension schemes around the world have accumulated significant reserves. Prefunding might reduce the risk that future governments will not be able to meet pension obligations. The management of these funds therefore, has a direct effect on financial sustainability and potential benefit levels. It also has important indirect effects on the overall economy, especially when the funds are large relative to domestic capital markets. In the past, most public pension funds have not been invested effectively, largely because of political interference. This paper reviews strategies for limiting risks that arise when a public entity is entrusted with managing national pension savings. In particular, an attempt is made to draw lessons from recent reforms in five OECD countries.

red arrowCzech Pension System: Challenges and Reform Options
Social Protection Discussion Paper No. 0217; Publication Date: 2002/06
by Esperanza Lasagabaster, Roberto Rocha and Patrick Wiese

The purpose of the paper is to review the structure and performance of the Czech pension system and examine alternative reform options. The paper shows that in the absence of reform the deficits of the Czech pension system may exceed 8 percent of GDP in 2050. To contain these deficits the paper explore two major PAYG reform options. The first major option is a standard parametric reform that preserves the defined benefit (DB) scheme. The second major option involves parametric reforms combined with a switch to a notional defined contribution (NDC) scheme. The paper shows that the NDC cum parametric reforms would automatically tighten the link between contributions and benefits and be more resilient to unpredicted demographic shocks. However, both the DB and the NDC options would produce a significant reduction in replacement rates, especially for young generations. To avoid an excessive drop in replacement ratios the authorities should make an effort to increase coverage of the third pillar and improve the regulatory framework for third pillar funds. The authorities may also have to consider introducing a second pillar to ensure universal coverage, especially of young workers. Introducing a second pillar will be easier if the PAYG reforms start immediately. This is because an early implementation of the PAYG reforms would produce a significant improvement of the PAYG and offset at least partly the revenue losses arising from the diversion of contributions to the second pillar.

Denotes Pension Reform Primer Paper The Reformed Pension Systems in Latin America (262kb pdf)
Social Protection Discussion Paper No. 0209; Publication Date: 2002/05
by José E. Devesa-Carpio and Carlos Vidal-Meliá

The transformation of the public pension system in Chile, which has served as a model for later reforms carried out in other Latin American countries, has attracted the attention of many researchers. The aim of this paper is to make a (provisional) technical assessment of the functioning of these systems. The operating structure is described and the main characteristics are analyzed. Main indicators are discussed including rates of return, level of pensions provided, actual coverage, administration costs, size and composition of fund portfolios, level of implicit pension debt, transition costs, and the problems arising due to the existence of alternative methods of pensions provision.

Denotes Pension Reform Primer Paper Mandatory Annuity Design in Developing Economies
Social Protection Discussion Paper No. 0208; Publication Date: 2002/05
by Suzanne Doyle and John Piggott

Pension policy has become one of the more volatile areas of economic reform in recent years. The onset of demographic transition, combined with concerns about the efficiency effects of a large public sector, has prompted a search for pension reform options that reduce governments' responsibility for direct financial support for the retired. This process is common to developing and developed economies alike. This paper explores the appropriate development of policy towards mandatory retirement-income streams within this broad framework, paying particular attention to the economic environments relevant to developing economies.

Denotes Pension Reform Primer Paper Pension Reform and Capital Markets: Are There Any (Hard) Links?
Social Protection Discussion Paper No. 0201; Publication Date: 2002/02
by Eduardo Walker and Fernando Lefort

The creation of fully funded, privately managed pension systems may have significant positive direct effects on savings, growth, and welfare. However, the indirect link, via capital market development, may be as important. This hypothesis is verified with evidence from emerging economies that have recently engaged in such reforms with a focus on Chile, Argentina and Peru. There is abundant qualitative and anecdotal evidence that relates pension reform with the accumulation of "institutional capital", with the existence of an adaptive legal framework, with increased specialization, transparency and integrity and even with better corporate governance. Evidence of increased financial innovation is also found while there is little evidence of bank disintermediation. In addition, time-series and panel data evidence is generally consistent with the following hypothetical effects: a reduction in the cost of capital; lower security-price volatility; and higher traded volumes. The evidence suggests that the indirect channel via capital market development may have important implications for economic growth and productivity.

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2001

Denotes Pension Reform Primer Paper Chile's Pension Reform After 20 Years
Social Protection Discussion Paper No. 0129; Publication Date: 2001/12
by Rodrigo Acuña R. and Augusto Iglesias P.

The aim of this paper is to describe the 1980 Chilean pension reform and to present its main results and economic impact. It is mainly descriptive; however the authors have tried to emphasize the lessons that may be learned and that may be of interest to other countries in different circumstances. In particular, the authors focus on potential areas for regulatory improvements. In Section II, a brief description of the AFP system and its place within Chile's social security system is presented. Also, the main characteristics of the transition from the "old" to the new system are sketched, together with the main changes in regulation after 1980. Section III includes a history of pension reform in Chile along with an analysis of the circumstances which may explain why the country decided to introduce such a radical reform. In Section IV, the performance of the AFP system is summarized. In Section V, the main economic effects of pension reform are discussed. Section VI presents the authors' view regarding future development in the regulation of the AFP system. The paper concludes with some comments on the timing of possible regulatory changes.

red arrowGenerational Accounting and Hungarian Pension Reform (96kb pdf)
Social Protection Discussion Paper No. 0127; Publication Date: 2001/10
by Róbert I. Gál, András Simonovits and Géza Tarcali

The essence of generational accounting is to break down total net contributions in a given year to each cohort and to project this profile into the future. Using additional assumptions on the discount rate and the growth of productivity and population, the per capita net contribution of future generations can be determined, which satisfies the inter-temporal budget constraint. Generational accounts in the Hungarian pension system show that the 1997 reform package significantly reduced the financial tension generated by demographic and institutional factors. The main source of improvement was a rationalization of social security. These conclusions are robust. Nevertheless, future imbalances depend on the dynamics of model parameters, primarily the rate of productivity growth.

red arrowIndividual Accounts as Social Insurance: A World Bank Perspective
Social Protection Discussion Paper No. 0114; Publication Date: 2001/06
by Robert Holzmann and Robert Palacios

The trend toward including individual accounts as part of the mandatory pension system continues unabated. Nine Latin American countries have introduced individual accounts (Chile, Peru, Argentina, Colombia, Uruguay, Bolivia, Mexico, El Salvador and Nicaragua) and several more are preparing to do so (Ecuador, Dominican Republic). A similar trend has emerged in Europe where the former socialist countries are taking the lead: Hungary, Kazakhstan, Latvia and Poland have already passed reform legislation and many others including Croatia, Estonia, Macedonia, Romania and the Ukraine are preparing their own versions. There is also movement in this direction in Western Europe, even in countries with large, state defined benefit plans like Sweden. Several Asian versions of the individual accounts strategy are also emerging, ranging from the gradually liberalization of Singapore's Central Provident Fund to Hong Kong's new, employer based, defined contribution scheme. In fact, reforms that assign an important role to individual accounts are being discussed in dozens of countries in every region of the world. This brief note states the broad arguments for individual accounts. The structure of the paper is as follows: Section II provides some needed clarification on "individual accounts", Section III outlines the main arguments for individual accounts while Section IV concludes.

red arrowAustralia's Mandatory Retirement Saving Policy: A View from the New Millennium
Social Protection Discussion Paper No. 0108; Publication Date: 2001/03
by Hazel Bateman and John Piggott

Formal retirement income provision in Australia can be traced back to occupational superannuation schemes first offered by banks and state governments in the 19th century. However, the year 1909 marks the beginning of a national retirement income policy with the introduction of a means-tested age pension. Since then retirement income provision has evolved into a multi pillar arrangement comprising the Age Pension, occupational superannuation and other long term saving through property, shares and managed funds. The 1990s saw the introduction of private mandatory retirement saving in the form of the Superannuation Guarantee. With the introduction of the Superannuation Guarantee, Australia joined a growing group of countries which centre their retirement income policy on private mandatory retirement saving. This paper provides a succinct description of the current system along with an analysis of its strengths and areas where improvement is still needed.

Denotes Pension Reform Primer Paper Annuity Markets and Benefit Design in Multipillar Pension Schemes: Experience and Lessons from Four Latin American Countries
Social Protection Discussion Paper No. 0107; Publication Date: 2001/03
by Robert Palacios and Rafael Rofman

A growing number of countries have introduced mandatory defined contribution schemes. As these schemes mature, their success will increasingly depend on how well they translate accumulated funds into a stream of retirement income. Successful reforms will rely on a well regulated and competitive insurance sector. They will strike a balance between individual preferences and public policy objectives such as providing a reasonable amount of longevity insurance. This paper describes the benefit stage in four Latin American countries and presents preliminary evidence on their emerging annuities markets. We find that these markets are less transparent than they should be and that supervision is less strict than during the accumulation period. Annuities markets will grow dramatically in the coming decades as the reforms mature. Growth depends on policy variables such as the use of recognition bonds as well as initial conditions. The markets in Peru and Colombia will be much smaller than those in Chile and Argentina in both absolute and relative terms. The immaturity of the schemes and temporarily limited flow of new pensioners should be viewed as a window of opportunity for improving supervision, increasing transparency and educating workers.

Denotes Pension Reform Primer Paper Kazakhstan: An Ambitious Pension Reform
Social Protection Discussion Paper No. 0104; Publication Date: 2001/01
by Emily S. Andrews

The pension reform in Kazakhstan was instituted to remove a deteriorating and costly pay-as-you-go (PAYGO) system with limited revenues, a relatively low worker to pensioner ratio, and accumulating pension arrears. Analysis was conducted to assess whether the economy could sustain a radical reform, which would make the implicit pension debt explicit. The first section of this report reviews the reform and provides a synopsis of the thinking behind its development, including the events leading up to it and the failings of the PAYGO system. In the second section, the administrative, business, and regulatory structures created by the pension reform legislation are described. In the third section, the progress of these entities in meeting the objectives of the reform is evaluated, particularly in terms of regulatory and financial market performance.

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2000

Denotes Pension Reform Primer Paper Contractual Savings or Stock Market Development: Which Leads?
Social Protection Discussion Paper No. 0020; Publication Date: 2000/08
by Mario Catalan, Gregorio Impavido and Alberto R. Musalem

This paper studies the relationship between the development of contractual savings (assets of pension funds and life insurance companies) and capital markets. The focus is on the macroeconomic and financial effects of contractual savings' development. New theoretical ideas and empirical results are presented. At the theoretical level, we explain how the growth of the contractual savings sector promotes financial development and economic growth through different channels. The authors argue that among institutional investors, contractual savings institutions are the most effective at developing capital markets. What is different about contractual savings is that their liabilities are long-term and illiquid assets in asset holders' portfolios. At the empirical level, the authors analyze Granger causality between contractual savings and both market capitalization and value traded in stock markets for some OECD and other countries. The evidence suggests that the growth of contractual savings cause the development of capital markets.

Denotes Pension Reform Primer Paper Pension Reform and Public Information in Poland
Social Protection Discussion Paper No. 0019; Publication Date: 2000/08
by Agnieszka Chlon

The introduction of a new pension system in Poland in 1999 was the culmination of a long policy dialogue and years of debate. During this period, the role of public opinion shaped the reform and was shaped by the reform process. Implementation of the reform will also be affected by the quality of information available to the public and their financial literacy. In contrast to their passive role in the old public, defined-benefit schemes, Poles that chose to divert their contributions to individual, defined-contribution accounts must now take an active role in the new system. This paper documents the fascinating evolution of public opinion and its affects on the reform process as well as the early experiences of millions of Poles who, for the first time, are faced with the challenge of choice as consumers in the new market for pension services.

Denotes Pension Reform Primer Paper Regulating Private Pension Funds' Structure, Performance and Investments: Cross-country Evidence
Social Protection Discussion Paper No. 0113; Publication Date: 2000/07
by P.S. Srinivas, Edward Whitehouse and Juan Yermo

Because defined-contribution systems expose pensions to a number of risks, reforming governments have often strictly regulated the pension fund industry's structure, performance, and investments. This paper compares the rules in the new systems of Latin America and eastern Europe with richer OECD countries. The authors argue that the benefits of competing pension funds and individual choice can only be achieved if regulations are loosened in the medium term.

Denotes Pension Reform Primer Paper How Poor are the Old? A Survey of Evidence from 44 Countries
Social Protection Discussion Paper No. 0017; Publication Date: 2000/06
by Edward Whitehouse

This paper surveys 11 international comparative studies of poverty, income distribution and the elderly. Although it focuses on OECD economies, some 44 countries are covered. The paper addresses a series of questions. What level are the incomes of the elderly relative to the population as a whole? How has this changed over the past two decades? How many of the old are poor? How many of the poor are old? Are the oldest old poorer than younger pensioners? How do widows fare? What is the mix between public and private sources of income? Do the elderly poor remain poor? There is also a discussion of methodological issues. The results show that the incomes of the elderly are typically around 80 per cent of incomes of the populations as a whole. In most countries, this ratio has been increasing over the past two decades. Although there remain pockets of poverty among the elderly, most studies show that the old are represented proportionally or under-represented among the poor.

Denotes Pension Reform Primer Paper Administrative Charges for Funded Pensions: An International Comparison and Assessment
Social Protection Discussion Paper No. 0016; Publication Date: 2000/06
by Edward Whitehouse

Pension fund charges reduce the rate of return on pension accounts in some countries by up to by two percentage points. Do charges of this scale undermine the case for funded pension provision? How can governments hold back costs and charges? This paper looks at evidence from thirteen countries, with policies ranging from complete liberalization of charge levels of structures to government imposed charge ceilings. The author stresses the trade-offs in limiting charges, especially in reduced competition and choice.

Denotes Pension Reform Primer Paper The Pension System in Argentina: Six Years After the Reform
Social Protection Discussion Paper No. 0015; Publication Date: 2000/06
by Rafael Rofman

In a context of a serious financial and legal crisis, Argentina reformed its Pension System in 1994, when a multipillar model with a funded scheme was introduced and first pillar parameters, as minimum age and vesting requirements were tightened. The new system has a significant first pillar (which offers a flat benefit currently valued at 28% of average wage to all retirees) and a second pillar that should provide a similar amount, once the transition is completed. The new system has developed rapidly and most formal workers have joined the new funded scheme. However, there are some problems that must be resolved. In the first pillar, the reform balanced long term finances, but it will also reduce coverage very rapidly, as a consequence of the combined effect of low formality in the labor market and stricter contribution requirements. The most serious problems in the funded pillar are the administration costs and the need to improve regulation and supervision of insurance companies, that provide disability and survivors coverage and annuities to beneficiaries. While these problems are important, their consequences can be avoided if adequate policies are developed by the Government. In this sense, the experience of the pension reform in Argentina is an excellent lesson for other countries that are considering a reform in their own systems.

red arrowPension Systems in East Asia and the Pacific: Challenges and Opportunities
Social Protection Discussion Paper No. 0014; Publication Date: 2000/06
by Robert Holzmann, Ian W. Mac Arthur and Yvonne Sin

With the recovery from the recent crisis, countries of the East Asia and Pacific region are rethinking their financial and social policy, including old-age protection. Population aging, in combination with ongoing urbanization and economic transformation, will place increasing pressure on traditional family care arrangements. Coverage under formal pension systems is generally low, and the absence of social safety nets for the needy elderly poses risks in the face of breaks in the economic growth path. In addition to common systemic challenges, formal old-age income support systems confront issues specific to their design type: (i) The national provident fund and social security-style systems with reserve funds have demonstrated problems with investment policy and performance, governance and management. (ii) In the established market economies, social security-type systems are fiscally unsustainable in the long run and often have a weak benefit-contribution link. (iii) These types of systems encounter additional problems in transition economies, including low contribution collection from previously socialized enterprises and rising benefit take-up, partly as a consequence of the policy response to labor market disequilibria. Despite the formidable reform agenda, countries have abundant opportunities to address these issues, and the low level of coverage, predominance of retirement schemes still in evolution and existence of funded provisions in many countries provide an environment conducive to reform. Options involve (i) avoiding mistakes (adopting an integrated view on retirement income provision, balancing individual equity and social equity with efficiency considerations, averting fiscal unsustainability and integrating public and private sector pensions); (ii) being innovative (moving toward a multipillar structure, prudently extending coverage, trying new approaches to reduce administrative costs and extending social risk management through informal support and safety nets); and (iii) fostering financial markets (decentralizing pension fund management; reviewing governance, regulation and supervision; and creating or supporting the provision of new instruments).

Denotes Pension Reform Primer Paper The Swedish Pension Reform Model: Framework and Issues
Social Protection Discussion Paper No. 0012; Publication Date: 2000/06
by Edward Palmer

This paper describes the recent Swedish reform and available options on major issues within this reform framework. In June 1994, Sweden's Parliament passed legislation replacing the old defined benefit system with a combination of a pay-as-you-go notional defined contribution (NDC) and a DC privately managed financial account scheme, based on a total contribution rate of 18.5 percent on earnings. The financial account scheme is run using a state-clearing house as a broker, and will have a state monopoly supplier of annuities. During the accumulation period, participants can choose among all registered funds, about 500 when they make their first choice in the autumn of 2000. Accounts were created in 1999, and two annual statements have been sent out since then. If the NDC and financial account schemes together do not reach a minimum level by age 65, and the individual chooses to retire at this age, benefits from these systems will be supplemented up to the guarantee level, determined by Parliament and financed with a state budget transfer. This reflects the fact that the PAYG NDC and financial account schemes are designed to function autonomously from social policy. Life expectancy is factored into the NDC annuity, and together with the financial account system, this innovation helps to shift the risk of an aging society onto workers while they are still active. There is no maximum retirement age, and the system offers a broad range of options for labor-force exit for older workers. Full, partial or no earnings from work can be combined freely with full or partial annuities from one or both of the public schemes from the minimum pension age of 61.

red arrowCan Investments in Emerging Markets Help to Solve the Aging Problem?
Social Protection Discussion Paper No. 0010; Publication Date: 2000/05
by Robert Holzmann

Prefunding of pension commitments in OECD economies is increasingly seen as a central strategy to cope with the aging of their populations. This paper argues that investments in emerging markets can help at the margin but are unable to solve the demographic problem. While these investments bring potential advantages through enhanced risk diversification, higher rates of return, and accelerated financial market development, the total effects are likely to be limited. Furthermore, in order to harvest them, capital sending and receiving countries must fulfill various politically and economically challenging requirements. For pension policy, the limited contribution of pre-funding at home and abroad in order to address the demographic problem implies that enhanced emphasis must be given to domestic reforms.

Denotes Pension Reform Primer Paper International Patterns of Pension Provision (684kb pdf)
Social Protection Discussion Paper No. 0009; Publication Date: 2000/04
by Robert Palacios and Montserrat Pallares-Miralles

Cross country data on public and private pension schemes are presented and explained. Relevant World Bank demographic projections and other indicators previously reported in "Averting the Old Age Crisis" are updated. Relationships between key indicators are highlighted.

Denotes Pension Reform Primer Paper Regulation of Withdrawals in Individual Account Systems
Social Protection Discussion Paper No. 0008; Publication Date: 2000/01
by Jan Walliser

Funded mandatory pension systems based on individual accounts are spreading around the world. With the maturation of those systems, regulating the withdrawal of retirement savings will become increasingly important. Government regulation of withdrawals should mandate the purchase of inflation-indexed life annuities exceeding income available from government welfare programs for the retiree and potential survivors. However, proper functioning of insurance markets does not require annuitizing the entire account balance. Instead, more flexibility for the choice of withdrawals could be permitted for any remaining funds, helping to tailor income streams to individual needs and living arrangements.rms of the existing unfunded programme with greater emphasis on funding the 'insurance' element of the pension plan.

Denotes Pension Reform Primer Paper Pension Reform, Financial Literacy and Public Information: A Case Study of the United Kingdom
Social Protection Discussion Paper No. 0004; Publication Date: 2000/01
by Edward Whitehouse

The project on public information and pension reform will explore these issues by examining a range of countries' experience. This, the first paper in the series, looks at the experience of the United Kingdom. A number of interesting initiatives to improve general and individual pension information are described and assessed.

Denotes Pension Reform Primer Paper Managing Public Pension Reserves Part I: Evidence from the International Experience
Social Protection Discussion Paper No. 0003; Publication Date: 2000/01
by Augusto Iglesias and Robert J. Palacios

Many pension schemes mandated by governments have accumulated large reserves. The management of these funds has a direct effect on financial sustainability and potential benefit levels. It also has important indirect effects on the overall economy when the funds are large. Part I of this study surveys some of the available cross-country evidence on publicly-managed pension reserves. We find that publicly-managed pension funds (i) are often used to achieve objectives other than providing pensions (ii) are difficult to insulate from political interference and (iii) tend to earn poor rates of return relative to relevant indices. These findings are consistent across countries of all types, but returns are especially dismal in countries with poor governance. The experience to date suggests that the rationale for prefunding have been seriously undermined by public management of pension reserves. Countries with serious governance problems should probably avoid funding altogether.

red arrowExtending Coverage in Multi-pillar Pension Systems: Constraints and Hypotheses, Preliminary Evidence and Future Research Agenda
Social Protection Discussion Paper No. 0002; Publication Date: 2000/01
by Robert Holzmann, Truman Packard and Jose Cuesta

The paper provides a set of preliminary hypotheses and exploratory econometric testing to explain low rates of participation in reformed social security systems, with special emphasis on two Latin American countries. The hypotheses claim that the working poor and self-employed continue to have a specific and strong rationale for avoiding participation in the multi-pillar pension system and that transactions costs, system design issues, and problems of credibility negatively influence the decision of all members of the labor force to participate. Some of the established hypotheses have been subjected to exploratory econometric testing using available household survey data for Chile and Argentina. The results support the conjecture that socioeconomic characteristics matter for (non) participation, and that the poor, the uneducated and the self-employed pose a special challenge to the extension of pensions coverage. The paper outlines a research strategy, including a more social security-focussed survey and comparative analyses, to confirm the results presented in this paper, and to test those hypotheses related to the different pensions institutions reforming governments have chosen to put in place. Work in this vein has already begun.

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1999

red arrowImproving the Regulation and Supervision of Pension Funds: Are There Lessons from the Banking Sector?
Social Protection Discussion Paper No. 9929; Publication Date: 1999/12
by Roberto Rocha, Richard Hinz and Joaquin Gutierrez

The increasing role of private funded systems in the provision of retirement income has led to an increasing interest in the analysis of regulatory and supervisory frameworks of the pension industry. This paper reviews the regulatory framework for pensions and examines whether there is scope for improvements in regulation and supervision. In carrying out this analysis, the paper also reviews briefly the regulatory framework for banks and asks whether there are lessons from bank regulation to pension regulation. Possible lessons from the banking industry arise in the area of guarantees, portfolio diversification, and the structure of supervision. Many countries have considered the introduction of guarantees to deal with market risk. The paper argues that multi-pillar constructions already reduce the workers' exposure to market risk, and that further efforts to reduce this risk should be very cautiously considered. Within the possible solutions to deal with market risk, the paper favors deferrals of pensions and different packages of annuities over guarantees. The paper also argues that pension supervision should examine the trends in bank supervision, which has been shifting from a basic inspection of compliance to a more general assessment of the quality of corporate governance in banks, and a more even distribution of responsibility among different market players, including boards, shareholders, and external auditors.

Denotes Pension Reform Primer Paper Notional Accounts as a Pension Reform Strategy: An Evaluation
Social Protection Discussion Paper No. 9928; Publication Date: 1999/12
by Richard Disney

The paper surveys and evaluates Notional Account-type pension reforms (sometimes known as Notional Defined Contribution plans, or NDCs). The distinguishing feature of such reforms is that a structure of individual accounts is established, to which contributions notionally accrue. No fund as such is established and the implicit 'return' on such accounts is determined by a formula linked to some underlying index of real wage bill growth. Notional Account (NA)-type reforms are described in a number of countries: in Italy, Latvia, Sweden and Poland. Notional Accounts are, in effect, identical to a well-designed defined benefit PAYG scheme with reasonable actuarial adjustments and a revalued lifetime earnings basis to pension benefits. The paper argues that, when examined on grounds of 'actuarial fairness', macroeconomic sustainability and microeconomic incentives, a reform strategy that introduces Notional Accounts as the centrepiece of the package is inferior to a strategy that combines 'parametric' reforms of the existing unfunded programme with greater emphasis on funding the 'insurance' element of the pension plan.

Denotes Pension Reform Primer Paper Reform Options for Pay-As-You-Go Public Pension Systems
Social Protection Discussion Paper No. 9927; Publication Date: 1999/12
by Sheetal K. Chand and Albert Jaeger

The recent history of traditional public pension schemes is one of continuous readjustment of benefit formulas, retirement ages and other parameters. This paper reviews the basic relationships that determine the fiscal sustainability of public pension schemes, the challenges of maturation and aging populations when schemes are finance on a pay-as-you-go basis and the options available to policymakers short of systemic reform.

Denotes Pension Reform Primer Paper Pension Plans and Retirement Incentives
Social Protection Discussion Paper No. 9924; Publication Date: 1999/08
by Richard Disney and Edward Whitehouse

The value of defined-contribution pensions, where the benefit depends on contributions and investment returns, shows a very different pattern with age of retirement from defined-benefit pensions. DB schemes, which are the norm in most public and much private provision around the world, provide an incentive to retire at the earliest possible age. DC schemes, in contrast, encourage people to remain in the labor force. The paper also assesses the features of DB plans which provide the greatest disincentive to continued employment at older ages, such as their accural structure with age and formulae based on final rather than average earnings. Reforms to DB systems, such as pension increments for later retirement, are examined. But the incentives are not as powerful as those in a DC plan.

Denotes Pension Reform Primer Paper Shaping Pension Reform in Poland: Security Through Diversity
Social Protection Discussion Paper No. 9923; Publication Date: 1999/08
by Agnieszka Chlon, Marek Góra and Michal Rutkowski

All over the world, pension systems have financing difficulties that need to be addressed. There are three ways of dealing with pension systems problems – finance it to a greater extent from general revenues, rationalise the system, which produces savings in the short run, or a full-fledged reform, changing the logic and foundations of the system. After several years of political and professional discussions, Poland decided to follow the latter path and introduced a new defined contribution mulitipillar system, consisting of a public Notional Defined Contribution, pay-as-you-go first pillar, a funded private second pillar, and voluntary funded third pillar. The new framework covers only retirement savings, while other benefits still remain under the old defined-benefit pay-as-you-go regime. The reform was launched on January 1, 1999. As of this date, the old defined benefit pay-as-you-go system was terminated for workers younger than 50. The new old-age system attempts to offer actuarially fair benefits, potentially creating incentives to increase compliance and postpone retirement. Minimum benefit provision for those who fall below the guaranteed level is co-financed from general revenue. Diversification of retirement savings provides greater security to the members, as labour market developments that determine the notional rate of return in the first pillar, and financial market developments that determine the second pillar rate of return are not perfectly correlated. This is why the reform package has been named Security through Diversity.
This paper presents the current situation of the pension system, the struggle for pension reform in the 1990s, structure, the long-term outlook of the new pension system and the main aspects of the system design as well as first experiences from the implementation process. Long-term projections show that the new system allows for greater financial stability of the public pension scheme and increases the savings rate with a positive impact on economic growth.

red arrowLatvian Pension Reform
Social Protection Discussion Paper No. 9922; Publication Date: 1999/08
by Louise Fox and Edward Palmer

In 1995, Latvia became the first country in Central and Eastern Europe to implement parametric reform of the Soviet-style PAYGO pension system, and the first in the world to implement the "notional defined contribution system" originally designed for Sweden. The Government's intention was to follow the overhaul of the PAYGO system with the creation of a funded second tier by 1998, but the reform has lagged. Public acceptance of the new system has been poor, and pressures for rollback of the reforms have grown. After such a splashy beginning why did the Latvian reform stall? What has been the net effect of the reforms after the roll backs? How did Latvia balance the difficult issues of system incentives, fairness (within and across generations) and affordability? What are the lessons of the Latvian experience with the NDC system for other reforming countries? These questions are the subject of this paper. It includes a description of pre-reform situation, describes the key provisions of the original reform and discusses the subsequent amendments. The impact of the reform is assessed on the basis of macroeconomic and microeconomic simulations. On the basis of those, the reforms are evaluated and conclusions for other countries are drawn.

Denotes Pension Reform Primer Paper OECD Public Pension Programmes in Crisis: An Evaluation of the Reform Options
Social Protection Discussion Paper No. 9921; Publication Date: 1999/08
by Richard Disney

Public pension programmes in OECD countries are in difficulties. With ageing populations, and declining participation of working age men in paid work, existing pension arrangements are likely to be unsustainable in the future in many of the richer OECD countries. Indeed, supporting existing pension commitments, even before the 'baby boom' generation reaches retirement, has already proved problematic in countries such as Italy. Some governments have already taken steps to tackle the pension issue but there is inevitably conflict over who will bear the burden of retrenchment: will it be current taxpayers, current pensioners, or future generations of taxpayers and pensioners, perhaps not yet born? This paper considers several issues. It examines the evidence as to whether public pension programmes in some richer OECD countries are indeed in need of major surgery, focusing in particular on the issue of fiscal sustainability. It then considers why programmes have got into financial difficulties. Consideration of this issue provides some clues as to what type of reform process is likely to be viable and credible. The paper then examines the strengths and weaknesses of some reform strategies. A central issue considered there is whether pension programmes should be funded or unfunded.

Denotes Pension Reform Primer Paper The Pension System in Singapore
Social Protection Discussion Paper No. 9919; Publication Date: 1999/08
by Mukul G. Asher

Singapore's formal pension system includes several elements including a non-contributory public employees scheme and social assistance for the elderly. The main source of mandatory retirement savings however, is the Central Provident Fund or CPF which also includes a variety of other forced savings programs covering housing, medical savings and other social objectives. This paper focuses on the defined contribution scheme whose role it is to provide income during retirement. Despite a high level of service and efficiency, the CPF has historically generated low returns to individuals under a centralized and opaque investment regime. This threatens to leave many old persons in Singapore with insufficient savings when they retire. Recent initiatives to allow contracting out of the investment with unit trusts and liberalization of investment rules may eventually provide the risk-return combination required for a funded pension scheme. At the same time, a public information campaign and a strengthening of regulations will help ensure that individuals are able to take advantage of these reforms.

Denotes Pension Reform Primer Paper Taking Stock of Pension Reforms Around the World
Social Protection Discussion Paper No. 9917; Publication Date: 1999/05
by Anita M. Schwarz and Asli Demirguc-Kunt

Systems providing financial security for the old are under increasing strain throughout the world. Over the next 35 years, the proportion of the world's population that is over 60 will almost double, from 9 percent to 16 percent. Populations are aging rapidly due to rising life expectancies and declining fertility rates. This puts added strain on extended families and other traditional ways of supporting the old which are already weakening under the pressure of urbanization, industrialization, and increased mobility. At the same time, public systems of old age security are themselves in need of reform. Most existing systems are very costly even though they provide inadequate protection for the old. The purpose of this paper is to provide a brief summary and evaluation of recent pension reforms around the world.

Denotes Pension Reform Primer Paper The Tax Treatment of Funded Pensions
Social Protection Discussion Paper No. 9910; Publication Date: 1999/04
by Edward Whitehouse

Pension funds are an important part of private savings flows, the main supplier of capital to industry and play a large and growing role in providing retirement incomes in countries with mature funded pension systems. Reforms which increase the emphasis on privately managed, funded pensions must get the tax treatment right. This paper sets out the options for taxing pensions, and the arguments between them. The tax treatment in 35 different countries is described and summarized in an empirical measure: the marginal effective tax rate. Other data assess the importance of pension funds and tax incentives in aggregate, drawing on national and international sources.

Denotes Pension Reform Primer Paper Collecting and Transferring Pension Contributions
Social Protection Discussion Paper No. 9907; Publication Date: 1999/02
by Gustavo Demarco and Rafael Rofman

Collecting social security contributions is an important operational issue in all types of pension system. Many regimes are plagued by poor compliance and weak, inefficient administration. Some countries have tried to introduce an automatic incentive to contribute by moving systems closer to 'actuarial fairness,' where pension benefits are more strictly related to individual contributions. Examples include the systems of individual accounts introduced in a range of countries in Latin America and Eastern Europe. But in these regimes, collecting and transferring contributions is a more complex process. This paper considers different aspects of the process of collecting pension contributions.

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1998

Denotes Pension Reform Primer Paper Supervising Mandatory Funded Pension Systems: Issues and Challenges (180kb pdf)
Social Protection Discussion Paper No. 9817; Publication Date: 1998/12
by Gustavo Demarco and Rafael Rofman

The regulation and supervision of pension funds is a critical part of building public confidence in a funded-pension system. This paper argues that confidence is best bolstered by an independent, autonomous and transparent supervision agency, particularly when previous systems had failed. The choice between proactive and reactive supervision depends on previous experience of self-regulation in a country's financial sector. The paper examines four key areas of supervision in detail: institutional, financial, membership and benefits control. It looks at collection of contributions, asset valuation, portfolio limits, custodianship and benefit guarantees. New data are presented on the performance of supervision agencies in and on marketing and operation costs of new pension funds in Latin America. Comparative data for OECD countries is also included.

red arrowSocial Protection Discussion Paper No. 9815 - This paper has been revised, please see No. 9923

Denotes Pension Reform Primer Paper The Role of Choice in the Transition to a Funded Pension System
Social Protection Discussion Paper No. 9812; Publication Date: 1998/09
by Robert Palacios and Edward Whitehouse

A critical question in the transition to a funded, private pension system is whether the new private element is presented as a mandate or choice to current and future workers. This paper sets out the spectrum of available options and looks at policy in 13 reforming countries. It concludes that older workers are best excluded from reform, because the economic benefits are small and the political resistance is likely to be large if they are included. However, a defined cut-off age is arbitrary for reasons of intergenerational equity and heterogeneity of portfolio composition and risk preferences within cohorts. A voluntary switch is preferred. The main objection is the resulting uncertainty over the numbers switching. Analysis of reforming countries shows however, a consistent and rational pattern of switching. The paper concludes by discussing policy options for managing the switching process.

Denotes Pension Reform Primer Paper Pension Reform in Britain
Social Protection Discussion Paper No. 9810; Publication Date: 1998/06
by Edward Whitehouse

This paper examines the evolution of the pension system in Britain. In particular, it focuses on the shift from pay-as-you-go, state-run defined-benefit pensions to individual, private-sector, funded defined-contribution accounts. It looks at three issues in this reform: the financing of the transition from pay-as-you-go to funded provision; the fiscal impact of voluntary switching and adverse selection; and the question of the degree to which personal pension accounts were 'over-sold' to individuals for whom they were not suitable. The paper examines recent reform proposals and the prospects for reform under the New Labour government elected last year. It concludes that the British system has avoided a future financial crisis arising from the demographic transition, but that problems of incentives and retirement-income adequacy remain.

Denotes Pension Reform Primer Paper Financing the Transition to Multipillar
Social Protection Discussion Paper No. 9809; Publication Date: 1998/12
by Robert Holzmann

The shift from a PAYG pension scheme to one which is fully funded ends the process of rolling over the unreported pension debt with each new generation. To the extent that current pensioners and workers have amassed pension rights in the old PAYG scheme, the government will be forced to borrow or tax in order to meet this obligation, which is often larger than the conventionally defined public debt. This paper focuses on assessing the size of the initial debt that will be made explicit, reducing it through policy measures and financing the transition through a combination of debt and tax financing. Producing such a strategy is a key challenge to pension refromers and crucial in determining the success or failure of this type of reform.

Denotes Pension Reform Primer Paper The World Bank Approach to Pension Reform (178kb pdf)
Denotes Pension Reform Primer Paper Also available in French (76kb pdf)
Social Protection Discussion Paper No. 9807; Publication Date: 1999/12
by Robert Holzmann

The paper highlights the World Bank's thinking and worldwide involvement in pension reform. Both are driven by the Bank's mandate to help countries develop economically and to reduce poverty. The Bank has four key concerns in working with clients on pension policy: (1) short-term financing and long-term financial viability; (2) effects on economic growth; (3) adequacy and other distributive issues; and (4) political risk and sustainability. In response to these concerns and after review of the three main reform options for unfunded systems - mere PAYG reform, a rapid and complete shift to a mandatory funded system, and a gradual shift to a multi-pillar scheme - the Bank clearly favors the multi-pillar approach but in a pragmatic and country-specific manner. When helping to implement a pension reform the Bank fully takes account of country preferences and circumstances, bases its support on sound reform criteria, links the client assistance with knowledge management, provides training and other measures to enhance the reform capacity of a country, and seeks cooperation with other international institutions. In addition, the Bank has a comprehensive research agenda to improve the working of multi-pillar schemes, and the investigations include issues of coverage, administrative costs and annuities.

Denotes Pension Reform Primer Paper Government Guarantees on Pension Fund Returns
Social Protection Discussion Paper No. 9806; Publication Date: 1998/04
by George Pennacchi

This essay reviews defined contribution pension return guarantees typically made by governments in connection with pension privatizations. Finance theory related to the pricing of options provides a unifying framework for evaluating the cost of these guarantees. The essay considers two types of guarantees on the rate of return earned by an individual pension fund: a guarantee of a fixed minimum rate of return; and a guarantee of a minimum rate of return that is set relative to the performance of other pension funds. A minimum pension benefit guarantee for a participant in a mandatory defined contribution pension plan is also discussed. Costs for each of these guarantees are illustrated using typical parameter values.

Denotes Pension Reform Primer Paper The Hungarian Pension System in Transition
Social Protection Discussion Paper No. 9805; Publication Date: 1998/04
by Robert Palacios and Roberto Rocha

After discussing the evolution of the policy dialogue in Hungary, the paper broadly describes the reform of the pay-as-you-go public pension system and its partial privatization as legislated in July 1997. Through a combination of a debt and tax financed transition, the first partial pension privatization in Central Europe is shown to generate increased national savings while placing the pension system on a more sustainable course. The potential positive impact on savings was diminished by politically-motivated compromises. Outstanding issues include problematic features of the "second pillar" and the reemergence of pay-as-you-go deficits in the long run. This suggests that further reforms, such as raising the retirement age beyond 62, will eventually be required.

Denotes Pension Reform Primer Paper Risks in Pensions and Annuities: Efficient Designs
Social Protection Discussion Paper No. 9804; Publication Date: 1998/02
by Salvador Valdes-Prieto

This paper considers alternatives to disperse the accumulated pension rights during the liquidation phase or retirement. First, the paper classifies the risks that affect pensioners, discusses the defined benefit and defined contribution options, and classifies pension contracts according to the type of risk they transfer to the worker. It considers fixed annuities, variable annuities, CREF annuities, and programmed withdrawals. This part is a description of the production function for pensions and annuities. Second, the paper offers a discussion of the restrictions that should be imposed by mandatory pension systems on the menu of pension contracts. One section discusses whether lump sum withdrawals should be allowed and the other discusses if there should be a mandate to annuitize wealth. The argument that the annuitization should be mandated to prevent adverse selection is rejected on the basis of Chilean evidence.

Denotes Pension Reform Primer Paper Building an Environment for Pension Reform in Developing Countries
Social Protection Discussion Paper No. 9803; Publication Date: 1998/01
by Olivia S. Mitchell

Fiscal problems are prompting many developing nations to amend and sometimes restructure their national old-age programs. As they do so, these countries seek guidance on how to design market and regulatory structures to enhance their chances of success. This paper investigates the types of risks facing participants in retirement systems, and examines which financial, regulatory, and labor market institutions appear most supportive of retirement system reforms, and most urgently needed, in developing countries.

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