By Judith Ugwumadu | 21 February 2014
Emerging European and Central Asian countries must start debating how they intend to overhaul their public pension systems and shore up basic income levels as their populations age, the World Bank has urged.
Speaking at the launch of a report today, Laura Tuck, World Bank vice president for Europe and Central Asia, noted that the region’s countries had been some of the ‘most active’ pension reformers in the world.
‘[They have adopted] a number of new pension designs, such as point systems in Serbia and Croatia, notional accounts in Latvia and Poland, universal benefits in Georgia, Kazakhstan, and Kosovo, and individual savings accounts in Estonia, Romania, F.Y.R. Macedonia, and the Russian Federation,’ she said.
‘However, many of these reforms have not been sufficient for pension systems to sustain adequate benefit levels in the face of deep demographic changes. Moreover, some of these reforms have been reversed in the face of short-term fiscal pressures.’
Ana Revenga, the bank’s vice president for poverty reduction and economic management, added that increases in life expectancy, sharp decline in fertility, and increasing emigration made many pension systems less affordable. Fiscal pressures have also led countries to increasingly limit their already-overstretched pension spending by making greater use of private sector provision and individuals’ savings, she said.
‘This report examines a range of solutions and concludes that the public pension system will have to prioritise the provision of basic pensions, coupled with measures to encourage longer working lives and individual own savings,’ Revenga said.
The report examines two potential solutions: generating additional revenue to cover pension deficits, and increasing the number of contributors to the system.
However, it noted that countries in Europe and Central Asia tend to have already high tax burdens, especially on labour, leaving them little scope for generating additional revenue to address pension deficits.
It stated that moving away from labour taxation as the financing source for old-age security toward consumption and property taxes could help generate some additional revenue, ‘but even there the scope is limited in most countries’.
Meanwhile, expanding the base of contributors ‘can only ease or delay needed reforms’ of pension systems if the relationship between contribution and benefit accrual remains fundamentally flawed, noted the report, The inverting pyramid: pension systems facing demographic challenges in Europe and Central Asia
The long-term solution lies 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, it concluded.
In addition, 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, the World Bank said.
And measures such as auto-enrolment can induce workers to fill any retirement income gap with their own savings, the report pointed out.
However, ‘there are no one-size-fits-all solutions,’ it concluded. ‘Regardless of the path chosen, countries need to begin a social dialogue on what approach [would meet the needs of their aging populations].’
- See more at: http://www.publicfinanceinternational.org/news/2014/02/world-bank-calls-for-pension-reform-debate-in-europe-and-central-asia/#sthash.8apPFraU.dpuf
