PensionReforms' summary and comments
The World Bank's 1994 publication Averting the Old-Age Crisis was significant in many respects. Its characterisation of a country's retirement income arrangements by "pillars" has encouraged many countries (28 at the last count) to introduce different versions of the model promoted by the World Bank.  PensionReforms doesn't agree with its prescription - see here.  Even World Bank staff modified its initial prescription to a five pillar model, including the oddly named "zero pillar".  Again, PensionReforms had reservations about the 2005 revision Old-Age Income Support in the 21st Century - see here.  And in any event, the 1994 prescription seems not to be working.  This latest report notes, for example, that in Latin America and the Caribbean, "nearly half the countries have coverage rates below 30 percent."

The World Bank is 'hosting' another think about pensions; this time about the various ways that governments "...aim to guarantee a minimum level of income during old age and to prevent poverty; examples are social pensions, minimum pension guarantees, and matching contributions."

Closing the Coverage Gap comprises 14 chapters written by a total of 20 authors and edited by three of them.

"The focus is on social pensions broadly defined-cash transfers, not linked to contributions, that take place after retirement or after a given eligibility age - and on their potential role as instruments for expanding access to old-age income security."

It also looks in less detail at two other possible interventions to protect the vulnerable: "the design of minimum pension guarantees and matching contributions within contributory systems."  The aim is to look at increasing "old-age income security and preventing poverty among the elderly."

The book first discusses why governments might be interested in transferring income to the elderly:
"The main justifications are the limited coverage of the mandatory pension systems (chapter 2) and the risk of poverty during old age (chapter 3). Chapter 4 then examines the rights-based approach to expansion of social security coverage based on the conventions and recommendations of the International Labour Organization (ILO). The middle part of the book deals with international experience.  Chapters 5, 6, and 7 review selected programs in low- , middle- , and high- income countries, respectively, and chapters 8 and 9 discuss in greater depth the cases of Japan and the Republic of Korea."

The concluding chapters of the book look at benefit design aspects that countries should think about:
"Chapter 10 presents a typology of retirement income transfers and analyzes the potential economic impacts of the programs.  Chapter 11 deals with financing mechanisms and the problem of allocative efficiency, given limited resources.  Chapter 12 addresses two key issues related to institutional arrangements and targeting systems: Should countries consider separate programs to target the elderly poor instead of using the general social assistance system to target all poor?  And, how can current proxy means-test systems be adapted to target the elderly poor?  Chapter 13 explores in more detail the links between social pensions and matching contributions in the context of a general strategy for expanding coverage.  Finally, chapter 14 provides guidelines for the design of the administrative systems needed to operationalize the various programs."

Several things occur to PensionReforms about different aspects of Closing the Coverage Gap.

First, there seems to be a recognition that citizens seem not to do, either what they are told or what is clearly in their 'best interests'.  Even acknowledging the "limited coverage of mandatory pension systems" (our emphasis) is, in PensionReforms' view, a step in the right direction.  If citizens ignore the law, governments are relatively powerless to do anything about it when it comes to retirement saving.  This failure forces policy attention in the direction of things that governments can do, like "social pensions", the subject of this latest report.  Increasing the coverage of contributory schemes can't address poverty amongst the old, even in relatively rich countries.  Direct action is really the only practical alternative, especially in poor countries.  As one chapter concludes "If the international community is serious about tackling old-age poverty, a social pension is the best answer we have."

Secondly, it is a step in the right direction for the policy implications of real experience to be documented.  The 1994 prescription always seemed to PensionReforms as a relatively simplistic response to complex sets of behaviours by citizens, employers, financial service providers, advisers and governments.  The subsequent reports (2005 and now 2009) demonstrate that pensions (public and private) seem to need more nuanced responses than the 1994 prescription allowed.  Even the Chilean 'poster child' (now nearly 30 years old) has had to bow to reality with the latest round of changes in 2008 (see here for more on those).  Poor old people can be ignored for a while, even for quite a long while, but sooner or later, some policymakers will begin to question why they are poor; why didn't (couldn't?) they do what they were told to do?

For PensionReforms, one of the most significant charts in the book was Figure 3.1 that compared the poverty rates for national and elderly populations amongst just the OECD countries (generally, that's the richest 30 countries).  PensionReforms acknowledges the difficulties with poverty measures and with international comparisons (as does the book) but how can Ireland, Australia, Mexico and Korea tolerate poverty rates, however measured, amongst the elderly of more than 25%?  And the United States, Spain and Greece levels of 15-20%?  Admittedly, one of the book's purposes is to explore ways of fixing this problem but PensionReforms thinks the overall solution (a resource-tested, Tier 1 pension) is more likely to be a sticking plaster-style remedy; addressing the result of less than optimal overall pension policies, rather than the cause.  If old people in a society do not have a 'fair' standard of living (however that is measured locally) then something is wrong.  For PensionReforms, that is the canary in the mine.

Another striking feature of Closing the Coverage Gap was its conclusion that "...based on first principles... universal programs are likely to be sub-optimal."  Those "first principles" are fiscal affordability, the 'income effect', the 'substitution effect and their effects on labour supply.  However, the book then didn't look closely at the range of countries with a truly universal system to see whether practice  and experience conformed to theory.  It concluded that, apart from anything else, fiscal constraints would mean that "universal pensions are unlikely to be the most efficient alternative."  Social pensions, it suggests, can be possible only through some form of targeting.

PensionReforms has already reported on poorer countries that are experimenting with universal Tier 1 schemes - see here (Samoa) and here (Lesotho).  For an experiment in a separate very poor community (not country) see here (Tanzania).  Sri Lanka can seemingly have an 'affordable' universal pension - see here.  Mauritius is a case of a once-poor country that introduced a universal pension but is now richer and still has the pension - see here.  It is a pity that the report did not take a close look at the more than half-century of universal age pensions in Mauritius.

And then there is the case of New Zealand, a richer (but not rich) country that has had a universal pension for most of the last 70 years.  It also has one of the lowest reported poverty rates amongst the elderly in the world (see here and here.  In Closing the Coverage Gap, New Zealand received some mentions but no close examination.  PensionReforms thinks that as the only richer country with a universal pension, the World Bank might be able to test some of its theoretical criticisms of a universal, adequate Tier 1 pension against a real life experience.

PensionReforms suggests that the countries which took the prescribed medicines of the 1994 Averting the Old-Age Crisis might have done better to investigate and reflect before plunging into a compulsory Tier 2 pension 'solution'.  Even the now proposed "social pension" seems like a complex addition to what are already opaque systems in most countries.  It would, for example, have been helpful for the book to include a full review of the implications and impact of Australia's income- and asset-tested Tier 1 pension that has been running for many years.  Given the book's emphasis on "social pensions" (rather than compulsory Tier 2 schemes), Australia would be an interesting live case study of some of the difficulties that structure raises in a rich country.  Why, for example does Australia seem to have such high pensioner poverty and such a large advisory profession that helps Australians to mitigate the impact of resource-testing on Tier 1 entitlements?  Why does Australia's mix seem to lead to reduced retirement ages for men but not women? (See here for more on this).  Why does it have an impact on the Australian housing market? (See here for more).  Unintended but rational responses seem to be the answers in both cases.

PensionReforms agrees with some of the concluding comments of the book's opening "Overview":  It suggests that a "first challenge is to compile better data for policy analysis."  The main areas are first, "measurement of poverty among the elderly".  Then measuring the "coverage gap" which is to say, why don't more people join formal retirement income schemes?  Next, the report suggests we need to know more about "labor market transitions" - people moving into and out of the 'informal sector' (thereby 'escaping' Tier 2 coverage).  PensionReforms thinks that should also cover the transition from fulltime work through to fulltime retirement.

Then there is the task of building "evidence about the potential role of matching contributions".  PensionReforms worries about this one - it sounds a bit like a new-style system of tax breaks with most of their problems.  The chapter on this recognises though that "matching defined contributions" (MDCs) won't fix the problems of today's pensioners.  It would be interesting to hear why the World Bank might support this kind of taxpayer-subsidised saving when, on pp. 116-119 of the original 1994 publication - Averting the Old Age Crisis - there was a clear warning that general revenue should not be used to subsidise an elite (higher income workers) who participate in a contributory system.

Finally, the report suggests that "it is essential to start assessing the interactions of the pension system with other components of the social insurance system."  This makes sense for tightly targeted "social pensions" but not for universal pensions.

PensionReforms thinks that governments should probably stick to things they can actually change and leave individuals and their employers as level and as simple a playing field as possible to make their own decisions on what might best meet their needs, their aspirations and their resources over time.  Governments should stand to one side as those decisions are made.

Still, PensionReforms thinks that Closing the Coverage Gap is a step in the right direction.  It enunciates more clearly the difficulties with the World Bank's 1994 prescription. (File size 5.4 MB; 246 pp)   323