The Hindu Business Line : Pension reforms urgent, says World Bank

AS policymakers in Asia, Europe and the US grapple with the long-term affordability of their pensions systems, a new World Bank report says that growing demographic and economic pressures are forcing both developing and developed countries to undertake urgent pension reform.

The report, `Old-Age Income Support in the Twenty-First Century: An International Perspective on Pensions and Reform', released in Washington on Tuesday, said more women in the global workforce, rising divorce rates, changing employment patterns in the global economy, rising budget deficits, and rising numbers of elderly are making the case for pension reform unavoidable.

"This report shows us that while pension reforms in most countries initially are driven by the short-term budgetary woes of keeping costly public systems afloat, the more important longer-term problems of worldwide ageing and social change, along with changes in our global economy are equally important to the debate," says Mr Robert Holzmann, Director of the World Bank's Social Protection unit, co-author of the new report, and a leading international authority on pension reform.

The report offers a common framework to help countries resolve their pension problems, proposing the diversification of pension systems into a combination of public elements to maintain minimum living standards, and privately managed and funded components, while emphasising the potential links between pension reform and conditions conducive to growth and development. Most public pension schemes were not designed to deliver current benefit levels when confronted with today's major demographic and economic changes. Therefore, keeping existing systems afloat will require either cutting public spending on health and education, or cutting pensions drastically for the next generations of elderly, the report noted.

In many cases, the report says, actual budget costs are hardly ever calculated in a comprehensive or transparent manner, and in most cases, pension schemes fail to grasp the standard `actuarial' principles involved in effective pension systems. The Bank, which has been involved in pension reform in more than 80 countries and provided financial support for reform to more than 60, says if problems like these are not solved, falling economic growth and greater poverty may be the end result.

Mr Holzmann says keeping unaffordable pension systems afloat, with continual budget transfers, are often the main cause of high and rising budget deficits.

The report said that for poor people, and workers who move in and out of formal employment, pension coverage in most developing countries is still very low. Improving coverage requires reforming expensive and unsustainable system; thinking about the introduction of social pensions if older poor people are more vulnerable than other `at-risk' groups in the population such as children and disabled people, and the financing can be assured; and introducing, or improving, voluntary and funded systems which are better able to help informal sector workers.

Highlighting the paradox on the pension front, the report said that the developed economies got rich before they got old, developing countries are getting old before they get rich but both face profound challenges as a result of population aging.

This has two main implications. First, pension systems that collect taxes from one generation to provide benefits to their parents will need to be adjusted to address the realities that elderly people live longer lives today than was anticipated when these systems were first designed. Second, pension systems will need to be more flexible to provide incentives for older workers to delay their retirement until later in life in order to maintain a sufficient workforce to sustain growth, the report said.

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