1

Gustavo Demarco

Pensions Global Lead

The World Bank

October 2020

Reforming Pensions

in the Pre and Post

COVID-19 world

Objectives Key Challenges in developing countries

• Low coverage

• Unsustainable

• Regressive

Pension systems pre 2020: objectives and challenges

Economic

Social

Financial

Fairness

Adequacy

The coverage challenge: informality and exclusion

94.7

91.0

76.1

61.3

39.4

8.9

0.0 20.0 40.0 60.0 80.0 100.0

SSA

SA

EAP

LAC

ECA

Developed

Non-contributor to Pension Scheme(% of labor force)

37.5

34.5

32.5

31.8

16.3

13.8

0.0 10.0 20.0 30.0 40.0

SA

EAP

LAC

SSA

ECA

Developed

Self Employment(% of total employment)

Source: Gatti, R. et al (2014): "Striving for better jobs. Informality in MENA". World Bank.

ECA: Eastern Europe and Central Asia EAP: East Asia and Pacific

LAC: Latin America and the Caribbean SA:South Asia

SSA: Sub-Saharan Africa

The coverage challenge: non-coverage persists

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Co

vera

ge r

ate

s in

mid

-2

01

0s

Coverage rates in mid-1990s

Sustainability challenge: The end of the demographic dividend

Mainly due to:

• Increased life expectancy

• Reduced fertility rates

Sustainability challenge: Parametric inconsistencies

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0 5 10 15 20 25 30 35 40

Acc

rual

Rat

e

Contribution Rate (%)

Retirement Age 55

Qatar

Guatemala

Italy

Iran

SAUDI ARABIA

Kuwait

Central African Republic

Liberia

Djibouti

NetherlandsAustria

Slovenia

TurkeyBahrain

GabonFrance

OmanUAE

Luxembourg

Belgium

Germany

Greece

Fairness challenge: Pension schemes are (unintentionally?) regressive

• Fiscal support to pension schemes redistribute income from taxpayers to the covered workers

• Benefit formulas based on last salaries benefit those workers with steep income profiles, who are higher income earners and those with highest levels of education

• Early retirement benefits those who can find a new job after retirement. Also usually those with professional background

• Earlier retirement age for women results in lower pensions and amplifies the earning gap between men and women

Age

EarningsReference wage for pension calculation takes the average of the last two years of contributory wages

… and they often have the wrong incentives• Incentives to:

• Retire at a young age• Under-report wages at early phase in the career (when benefit formula is

based on last salary )

• Lack of incentives:• To seek private sector jobs (preference for public sector in countries where

public sector coverage is higher and pension rules are more generous for civil servants than the private sector)

• For women to participate in the labor force (same vesting period as men, some survivorship pension schemes)

New challenge: the changing nature of work• Labor markets will evolve towards more flexible jobs and self

employment, for which the contributory Social Insurance schemes have been largely unsuccessful.

• The new digital economy will require adapting the programs designed to traditional employment modalities (wage employment under a single employer);

• To prevent from further reduction of covered population, pension systems will need to rely on a stronger combination of minimum noncontributory pensions (to ensure an extended coverage) and retirement savings or tightly income related DB (to ensure income replacement).

The digital economy: Adapting Social Protection and Labor policies

• Paradigm shift in Social insurance: driven by • changes in the world of work • technological change

• The paradigm change may imply a greater space for:• Flexible retirement• Savings schemes • Broad-based (targeted) non-contributory minimum benefit• Use of technology for service delivery

• … and a greater need for:• coordination with current Social Assistance programs• IT platforms• Lifelong education

What might a future social protection policy package look like? (World Bank’s Social Protection White Paper)

Purely voluntary privately financed

“Nudged”, incentivized & privately financed

Mandated & individually

financed

Guaranteed minimum:

Purely publicly financed from

general expenditure

(broadest tax base)

Policy package of protection

Minimum guarantee

• Transfers;• Subsidized

premiums**

Minimal “adequate”

smoothing

N/DC accounts;

Actuarially-fair DB

Default opt-ins;

Information

Regulated market provision of

secure savings & insurance;

Micro finance saving & insurance

Prevents

poverty and

catastrophic

losses

Sufficient to

ensure

income

above the

minimum,

safeguarding

against

moral

hazard

** Replaces contributory minimum guarantees and tax incentives

Digitally

enabled

The turbulent 2020: COVID challenges for pensions

• Elderly and Persons with disabilities are particularly vulnerable to COVID-19.

• But Pension increases are expensive, and the crisis also affects the continuity of jobs and the ability of many workers and employers to continue paying contributions to Social Insurance programs

• Future pensions may be result lower due to the loss of contributions, early withdrawals and lower returns on pension assets

• Payments and IT systems need to significantly reduce face to face interaction and concentration of beneficiaries;

Social Insurance: COVID Response

7

8

12

13

51

0 10 20 30 40 50 60

advance payment of pensions

loosening regulations on pensionwithdrawals

administrative & delivery adaptation

pension top-ups

social security contribution reforms

count of countries

Low-income countries still have a small proportion of pensions paid in bank accounts

Forward looking

• Compensatory measures: Stronger focus on pension reforms

• Increased focus on different modalities of work (self-employment, flexible work, gig economy)

• Link social insurance programs to improve emergency response to multiple risks

• Faster development and access to IT solutions (payments and service delivery)

• Lifelong learning to support longer careers

• Stronger focus on long term care and active aging