PensionReforms' summary and comment

In 1994, the World Bank published a report Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth. That recommended a three-pillar approach to pension reform - first, a mandated, publicly managed, unfunded, defined benefit pension; secondly, a mandated, funded, privately managed defined contribution scheme and lastly, voluntary retirement savings. When you are a developing country that needs the Bank's financial support and your pensions are in a mess, well you would be excused for listening to your lifeline.

This 2005 update is not from the World Bank itself but rather from all the pension people who matter at the World Bank. It draws on "the past decade of experience" as the Bank has apparently been involved in pension reforms in over 80 countries. That experience has shown the Bank that the world requires a touch more flexibility than the 1994 three-pillar model allowed.

The authors recommend now that a country adopts "some combination of five basic elements":
1. so-called "zero pillar" - a social pension that provides a minimal level of pension; often called a "demogrant" or "citizen's pension";
2. "first pillar", contributory pension, linked to and intended to replace part earnings;
3. mandatory "second pillar" - an individual savings account;
4. voluntary "third pillar" that could be individual or employer-sponsored;
5. informal, intra-family or intergenerational financial and non-financial support.

"The main changes to the Bank's perspective concern the enhanced focus on basic income provision for all vulnerable elderly as well as the enhanced role for market-based, consumption-smoothing instruments for individuals both within and outside mandated pension schemes."

The report is a closely written, re-casting of the 1994 recommendations. Real life has apparently intruded on "tidy", formulaic reforms - workers seem not to want to be forced into doing what they don't want to do. And it seems not to matter how poor you are; homo economicus prevails.

The Bank cannot be faulted for emphasising the importance of "basic income security and poverty alleviation across the full breadth of the income distribution." Nor for the emphasis on the establishment and maintenance of sound capital markets, of developing good information and general good governance - both by governments and markets. But there are some curious gaps:
(a) There is a surprising lack of curiosity as to why, having alleviated poverty on whatever basis a country can afford, governments should have any interest in what citizens choose to live on in retirement beyond the "zero pillar" and how they might achieve that objective.
(b) There is no (zero) reference to the cost and probable ineffectiveness of tax incentives for private retirement saving.
(c) Given the vastly different approach adopted by New Zealand, there are only four references to that country's name, three of which concern the fund recently established to help pay for tomorrow's "zero pillar".

The report wonders how a pension system that delivers on most if not all of its objectives might look like - "Quite likely such a system does not (yet) exist." Perhaps not but a sideways look at what New Zealand does now might give some idea of what such a system could look like - perhaps we might need to wait for a 2016 version of Averting the Old-Age Crisis?     2