More on the new World Bank report on pensions reform

As I already wrote last week, the World Bank has released a new report on pension systems’ reform. Here you will find a quick sumary of the Goals and Criteria That Define the World Bank’s Perspective.

Primary Goals: Adequate, Affordable, Sustainable, and Robust Pensions

Adequate: The goal of any pension reform should be to ensure that all people regardless of their level or form of economic activity have access to the capacity to remain out of extreme poverty in old age and that the system as a whole provides assurances that those individuals who live beyond the expected norms will be protected from the “riskâ€? of extreme longevity.
(…)
World Bank experience generally indicates that, for a typical, full-career worker, an initial target of net-of-tax income replacement from mandatory systems is likely to be about 40 percent of real earnings to maintain subsistence levels of income in retirement. (…)Targeting average replacement rates above 60 percent is not likely to be viable over the long term.

Affordable refers to the financing capacity of individuals and society Although higher replacement rates seem desirable, they come at a cost. World Bank experience indicates that mandated contribution rates in excess of 20 percent are likely to be quite detrimental for middleand high-income countries with a well-developed structure of collection; for low-income countries, the threshold may be as low as 10 percent.

Sustainability, therefore, ultimately refers to the primacy of output in determining overall constraints and the capacity of any reform to provide the promised benefits without unduly displacing other claims on future resources.

Robust refers to the capacity of the system to withstand major shocks and to remain viable in the face of unforeseen conditions and circumstances. The key outcome in this regard is the capacity of the system to sustain income-replacement targets in a predictable manner over the long term. Main shocks to the system may come in the form of economic, demographic, or political risks.

Secondary Goal: Contribution to Economic Development

The secondary goal of mandated pension provisions (and their reform) is to create developmental effects, either by minimizing negative impacts, such as the effects on labor markets or macroeconomic (in)stability created by imbalanced systems, or by leveraging positive impacts, especially by increasing national saving and by promoting financial market development. Pension schemes have an important impact on the level and growth of output and distributable resources.

Reform Criteria

  • Does the reform make sufficient progress toward the goals of a pension system?
  • Is the macro and fiscal environment capable of supporting the reform?
  • Can the administrative structure operate the new (multipillar) pension scheme efficiently?
  • Have steps been prepared to establish the regulatory and supervisory arrangements and institutions to operate the funded pillar(s) with acceptable risks?
  • Is there a long-term, credible commitment by the government?
  • Is there consensus building through local buy-in and leadership?
  • Does it include sufficient capacity building and implementation?

Press release: New Bank Report Says World Faces Pensions Crunch-Major Reforms Unavoidable
Full Report: Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform by Robert Holzmann, Richard Hinz, and Bank staff, 2005