Publication: Switching : The Role of choice in the Transition to a Funded Pension System

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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.
World Bank. 2005. Switching : The Role of choice in the Transition to a Funded Pension System. World Bank Pension Reform Primer Series. © Washington, DC. License: CC BY 3.0 IGO.
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