Pension Reform Primer

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The World Bank Pension Reform Primer aims to provide a comprehensive, up-to-date resource for people designing and implementing pension reforms around the world.

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    Modeling Pension Reform : The World Bank's Pension Reform Options Simulation Toolkit
    (Washington, DC, 2010-11) World Bank
    Today's pension policies can affect retirement incomes and the public finances for decades to come. Retirement income systems that are affordable today, will often prove unsustainable in the future, given the twin pressures of demographic aging and the maturing of pension schemes. The World Bank's pension reform options simulation toolkit (PROST) models pension contributions, entitlements, system revenues, and system expenditures over a long time frame. The model is designed to promote informed policymaking, bridging the gap between quantitative and qualitative analysis of pension regimes. It is a flexible, computer-based toolkit, easily adapted to wide range of countries' circumstances.
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    The Financial Crisis and Mandatory Pension Systems in Developing Countries : Short-and Medium-Term Responses for Retirement Income Systems
    (World Bank, Washington, DC, 2008-12) Dorfman, Mark ; Hinz, Richard ; Robalino, David
    The international financial crisis has severely affected the value of pension fund assets worldwide. The unfolding global recession will also impose pressures on public pension schemes financed on a pay-as-you-go basis, while limiting the capacity of governments to mitigate both of theses effects. Governments are reacting to these events in different ways. Some are asking whether the balance between funded defined-contribution and unfunded pension schemes should be reconsidered. A few have already taken actions to reverse prior reforms. This note discusses the potential impacts of the financial crisis on fully funded and pay-as-you-go retirement-income systems in World Bank client countries, and identifies key short-and medium-term policy responses.
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    The World Bank Pension Conceptual Framework
    (Washington, DC, 2008-09) World Bank
    Since the mid 1980's, the World Bank has responded to the need to strengthen social insurance and contractual savings systems providing old age income support in developing countries. Such support has also been driven by pressures of global population aging, the erosion of informal and traditional family support systems, and weaknesses in the governance and administration of existing pension systems. The importance of effective formal sources of retirement income is accentuated by changes in work and family patterns including the increasing participation of women in formal employment, rising divorce rates, diminishing job stability and increases in local and international labor migration. The Bank's conceptual framework has emerged from its experience in Bank-supported reforms and the changing conditions and needs in client countries. Following the important work of the mid-1990's, averting the old age crisis that established key principles and concepts, the Bank's attention has increasingly focused on refining system designs to adapt these principles to widely varying conditions and better address the needs of diverse populations to manage the risks in old age.
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    Switching : The Role of choice in the Transition to a Funded Pension System
    (Washington, DC, 2005-07) World Bank
    The transition from a wholly public, pay-as-you go pension system to one where pensions are also provided by individual, privately managed pension accounts does not directly affect those receiving pensions at the time of the reform. Nevertheless, it could affect all current and future workers. A critical policy choice is whether these workers should be allowed, encouraged or forced to divert their pension contributions to the new private element. The note continues with an in depth analysis of the spectrum of switching strategies; and further, describes the objectives of a successful reform. First, the new scheme should aim to provide a reasonable level of retirement income. Secondly, the benefit level must be consistent with long-run fiscal policy. The diversion of payroll taxes from financing current pay-as-you-go pensions into the funded scheme will increase deficits at first, so short-term fiscal constraints are also important. Thirdly, pension reform has microeconomic objectives: improve the workings of capital and labor markets. Finally, the reform must be politically palatable. Some of the note conclusions are : older workers are best excluded from reforms, because there is little time to build substantial funds in the new private scheme; a mandatory cut-off age is arbitrary and leads to political or legal challenges; and Governments can and should manage the switching process, by altering incentives and ensuring people make informed choices.
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    Coverage : The Scope of Protection in Retirement Income Systems
    (Washington, DC, 2005-07) World Bank
    The coverage of old-age protection systems is a central concern in developing countries. While most countries mandate that workers make contributions to a retirement-savings plan, fewer than ten per cent comply in South Asia and Sub-Saharan Africa, as compared to higher-income OECD countries which cover 80 per cent or more of their workforce. Economic development is the major determinant of coverage protection for retirement systems, with the level of income per capita as an excellent predictor of coverage rates. The note concludes that : a) coverage rates track income levels closely and evasion is driven by the high cost of joining the formal sector; b) pension scheme design can exacerbate the evasion problem; c) a poorly designed and managed scheme should be reformed prior to attempts to expand its coverage; d) extending financial solvency of a pay-as-you-go scheme is not a good rationale for expanding coverage; e) a safety net can help cover the inevitable gaps in a contributory scheme; f) defined contribution schemes tend to provide better incentives for coverage; g) creative approaches to expanding coverage include direct matching contributions for low income workers and finding ways to reduce transaction costs by harnessing existing groups.
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    Taxation : The Tax Treatment of Funded Pensions
    (World Bank, Washington, DC, 2005-07) Whitehouse, Edward
    The tax treatment of funded pensions is a critical policy choice in pension reform. In countries with mature funded systems, like the Netherlands, Switzerland, the United Kingdom and the United States, pension funds are worth 85 per cent of GDP on average. Pension funds in mature systems are large and could prove an attractive revenue target. They are a major force in private savings flows, supplying capital to industry and providing retirement incomes. The note continues with an in depth analysis of taxing pensions, and further, highlights the question, how generous a tax treatment? There are three arguments for taxing pensions more generously that other kinds of savings. a) to ensure people have a standard of living in retirement close to when they were working, b) to cut the cost of social security benefits for pensioners, and to increase long-term savings. The note concludes that : the 'expenditure tax' taxes pension savings once, either when contributions are made or benefits withdrawn it is the best way of taxing pensions, because it is neutral between consuming now and consuming in the future; most countries treat pensions close to the expenditure tax, the pre-paid tax, which exempts benefits, collects more revenue now, but may not be credible.
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    Notional Accounts : Notional Defined Contribution Plans as a Pension Reform Strategy
    (World Bank, Washington, DC, 2005-01) World Bank
    Notional accounts are designed to mimic a defined contribution plan, where the pension depends on contributions and investment returns. (For this reason, they are sometimes called notional, defined-contribution schemes). Pension contributions are tracked in accounts which earn a rate of return. However, in notional accounts, the return that contributions earn is a notional one, set by the government, not the product of investment returns in the markets.
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    Transition : Paying for a Shift from Pay-as-You-Go Financing to Funded Pensions
    (World Bank, Washington, DC, 2005-01) World Bank
    There is a widespread perception that public pension systems in richer countries are in crisis. As schemes mature and the population ages, the burden of financing pensions has grown and, on current policies, will rise much further. Developing countries are younger and pension systems relatively immature. But the transformation in demographics and pension benefits that took over a century in richer nations is forecast to take less than 30 years in developing economies. The Bank has argued that a 'three-pillar' pension system can mitigate emerging problems in developing countries' public pension systems. The recommended system, set out in Averting the Old Age Crisis consists of 'a publicly managed system with mandatory participation and the limited goal of reducing poverty among the old; a privately managed mandatory savings system; and voluntary savings'. The note compares funded and pay-as-you-go finance of retirement incomes, highlighting the transition double burden, and, stipulates size of the transition will depend on the starting point: How generous is the current pay-as-you-go pension promise? How mature is the pay-as-you-go pension system? What is the age structure of the population? Transition costs can be controlled by a number of policies: Limiting the coverage of the funded program to new labor-market entrants or younger workers spreads the transition cost over a longer period; Scaling down existing pay-as-you-go liabilities is likely to play an important part in any fundamental pension reform; Governments can share in any extra returns to the funded system and use them to help pay for the transition cost. Countries have in practice used a mix of strategies. The precise balance between debt and budgetary finance (spending cuts or tax increases) should be chosen in the general context of a country's fiscal policy.
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    Administrative Charges : Options and Arguments for Controlling Fees for Funded Pensions
    (World Bank, Washington, DC, 2005-01) World Bank
    The adequacy of retirement incomes is a central goal of all types of pension system. In defined contribution pension plans, the benefit depends on the amount of money paid in, the investment returns earned, and the amount fund managers charge for administering accounts and investing the assets. Government policy affects all three factors directly and indirectly. This briefing focuses on the third: administrative charges. It looks at the policies on charges, and compares the fees levied in practice in fourteen, very diverse countries.
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    Annuities : Regulating Withdrawals from Individual Pension Accounts
    (Washington, DC, 2005-01) World Bank
    Pension, to most people, implies a regular payment from a specific age-such as retirement-until death. Individual retirement accounts are a vehicle for retirement savings but they do not become a pension in the conventional sense of the word until they are converted to an 'annuity'. How much and what type of annuitization should be mandated are key policy questions facing reformers. Economists believe that annuities can make people better off. The intuition is straightforward. Life expectancy is normally uncertain. So people would have to spend accumulated wealth slowly after retirement to ensure an adequate income should they live a long time. This kind of self-insurance is costly because it increases the chances that people will consume less than they could have if they knew when they were going to die. This cost can be reduced with annuities, which pool risk across individuals.