Individual accounts as social insurance : a World Bank perspective

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. More detailed discussion of specific reforms and issues can be found at www.worldbank.org/pensions. 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.Banks&Banking Reform,Environmental Economics&Policies,Health Economics&Finance,Poverty Assessment,Pensions&Retirement Systems

Implicit pension debt: issues, measurement and scope in international perspective

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.Banks&Banking Reform,Pensions&Retirement Systems,Economic Stabilization,Economic Theory&Research,Environmental Economics&Policies

Annuity markets and benefit design in multi-pillar pension schemes : experience and lessons from four Latin American countries

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.Insurance&Risk Mitigation,Pensions&Retirement Systems,Non Bank Financial Institutions,Environmental Economics&Policies,Banks&BankingReform

Social pensions Part I : their role in the overall pension system

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. We 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.Poverty Impact Evaluation,Poverty Monitoring&Analysis,Services&Transfers to Poor,Insurance&Risk Mitigation,Rural Poverty Reduction

Civil-service pension schemes around the world

There are separate pension schemes for civil servants (and often for other public-sector workers) 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 provides the first, detailed cross-country comparison of the terms and conditions of national and public-sector pension schemes. Civil-service schemes are typically more generous than national pension programs. Analysis of current pension spending shows that pensions for public-sector workers are a bigger burden on the government budget in developing countries than they are in higher-income economies.pensions; civil service; retirement

The role of choice in the transition to a funded pension system

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 report sets out the spectrum of available options and looks at policy in 13 reforming countries-Argentina, Bolivia, Chile, Colombia, El Salvador, Mexico, Peru, Uruguay, Croatia, Hungary, Kazakhstan, Poland, and the United Kingdom. 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.Non Bank Financial Institutions,Banks&Banking Reform,Pensions&Retirement Systems,Environmental Economics&Policies,Economic Theory&Research

OLD AGE POVERTY IN THE INDIAN STATES: WHAT THE HOUSEHOLD DATA CAN SAY?

In the absence of any official measures of old age poverty, this paper uses National Sample Survey household-level data to investigate the extent and nature of living standards and incidence of poverty among elderly in sixteen major states in India. We construct both individual and household-level poverty indices for the elderly and examine the sensitivity of these poverty indices to different equivalence scales and size economies in consumption. In general, these adjusted estimates indicate that households with elderly members have lower incidence of poverty in all of the states, albeit to different degrees. Part of the explanation appears to be related to differences in dependency ratios in households with and without elderly, where a significant percentage of elderly, especially men, continue to work well past the age of sixty. The favourable effect of the presence of elderly on household living standards and incidence of poverty is however weakened once we control for dependency ratio, among other things, with significant inter-state variation noted in our sample.Old age poverty, Living standards, Poverty indices, Equivalence scale, Size economies in consumption, Social protection of the elderly, Inter-state disparity in India.

The Role of Choice in the Transition to a Funded Pension System

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.pensions; funding; pay-as-you-go

Understanding Poverty among the Elderly in India: Implications for Social Pension Policy

The Government of India is implementing a new policy which dramatically increases funding for a cash transfer program targeted to the poor elderly. The expansion of this ‘social pension’ in terms of coverage and benefit levels is taking place with little understanding of poverty among India’s elderly or its determinants. This paper finds that households with elderly members do not have higher poverty rates than non-elderly households. This result is robust under various measures that take into account the size and composition of households. Separate evidence suggests that part of the explanation for this phenomenon is that the poor have higher mortality rates and are therefore underrepresented. This explanation has important implications for social pension policy and suggests that programs that reduce elderly mortality may actually increase the relative poverty levels of the elderly.old age poverty, household demographic composition, adjusted poverty indices, elderly contribution, survivorship bias

The Hungarian pension system in transition

After discussing the evolution of the policy dialogue in Hungary, this report 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 systemon 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.Pensions&Retirement Systems,Environmental Economics&Policies,Banks&Banking Reform,Public Sector Economics,Economic Theory&Research