Coverage : The Scope of Protection in Retirement Income Systems

Abstract

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.