World Bank: Pension reforms needed in EECA to protect future generations

24/02/2014 09:22
Asia-Plus
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DUSHANBE, February 24, 2014, Asia-Plus -- The profound effects of aging  populations  and a shrinking  labor force on  overstretched state pension schemes  in  the region of Emerging  Europe and Central Asia (EECA)  demand significant  reforms,  says the World Bank’s  new  report, The Inverting Pyramid: Pension Systems Facing Demographic Challenges in Europe and Central Asia.

If  bold pension  reforms  are not made, it will be today’s  young and the elderly poor who will suffer the most  from the inability of  state pension systems to ensure basic income protection in old-age.  Failing to act today raises equity concerns for the next generation as it would likely result in future pension benefits cuts and these would hurt the poor more than the rich, according to the report.

The report, launched on February 21 in Brussels at a conference hosted by the European Commission and the World Bank, finds that most pension systems have already reached “maturity,” with little possibility to expand the number of contributors due to a stagnant and declining working-age population.

The declining working-age population is causing the traditional population pyramid – with a few elderly at the top and larger numbers of working-age populations at the bottom – to invert, with smaller working-age populations now at the bottom and larger numbers of pensioners toward the top.

The report states that transition countries of Europe and Central Asia, including Turkey, have made big efforts in the past 20 years to reform their pension systems in order to align them with the new social and economic realities of market economies.  However, with the high economic growth of the mid-2000s, some countries increased the generosity of pension benefits in light of their higher revenues.  The financial crisis left these countries with reduced revenues and higher pension benefits, which led to pension reforms reversals.

The report examines two potential solutions to face the demographic challenges to pension systems: generating additional fiscal revenue to cover pension deficits, and increasing the number of contributors to the system.

While both additional revenue and increased labor force can contribute to mitigate short-term adverse impacts of unavoidable pension reforms, the long-term solution might lie in adjusting the generosity of pension systems so that retirement income covers only the period when individuals can no longer work, typically the last 15 years of life.  This is what was afforded to retirees in the 1970s, compared to an average of 18 years of retirement for men and 23.5 years for women in many countries today.

Raising retirement ages and encouraging and supporting individuals to work longer would go a long way toward enabling pension systems to provide for basic old-age income and be more financially sustainable.

Measures to encourage older workers to continue working include: providing options for gradual retirement, for example, by allowing older people to work part-time while collecting a partial pension; adopting small adjustments to the workplace, such as putting magnification on computer screens and providing ergonomic chairs,  to raise the overall productivity and comfort level of older workers ; and investing more effectively in training at older ages by rethinking  adult  education, training, and lifelong learning systems to make them a better fit for aging brains.

Finally, fiscal pressures are leading countries to increasingly limit their already-overstretched pension spending by fostering private pension provision and individual long-term savings plans.  Savings allow workers to have additional retirement resources available.  Measures such as automatic enrollment in savings schemes can induce workers to fill any gap in retirement income with their own savings.

There are no one-size-fits-all solutions.  Regardless of the path chosen, countries need to begin a social dialogue on what approach is best suited in each country context to preserve the ability of pension systems to provide basic income protection in old-age for today’s young and the less well-off elderly in the face of their demographic challenges. 

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