PensionReforms' summary and comments

This paper is part of the IEA's Empowerment Through Savings financed by the Templeton Foundation.

If you can't depend on institutions (corruption is endemic), on collecting tax or even getting your money back from a savings institution, never mind expecting a net real rate of return, does that mean public policy should just give up?  Not so, according to this paper.

The paper offers Nigeria as "a prime example of a developing country with ill-defined property rights."   But, despite the fact that the average expectation of life is only 43, Nigeria has old people who need looking after in a material sense.  In this environment, why would a country even think about a Chilean-style arrangement?  Well, that's what happened in 2004 - the Contributory Pension Scheme applies to all employers with five or more employees.  Given that about 70% of the labour force works in small-scale agriculture, the new scheme applies to only a small part of the workforce.

"Nigeria has had a rough history in terms of its state pension systems, and most people are still outside the existing schemes. The 2004 reforms show some positive developments, but will not make a big difference to the old-age security of most Nigerians. Most people still depend largely or entirely on informal structures ranging from family-based support to savings schemes such as Roscas [rotating savings and credit associations]."

Apparently, between 50 and 95% of the adult population in Africa participated in a Roscas in the mid 1990s.

"The situation in Nigeria highlights the importance of the informal system, which works for the majority of the population in a way which formal state-operated systems are unlikely to in the foreseeable future. Most apparent weaknesses of the informal system are mainly due to people being too poor to save adequately. A more substantial weakness is that their small size and locality does not allow diversification of risk, and systems can be undermined by localised disaster."

As the paper notes, the informal, family-based systems is widely-based, provides basic needs with no bureaucratic involvement and covers not just old age but other social needs (unemployment, illness).

PensionReforms thinks that, for any system of public pensions to work, the order of events in a country like Nigeria (not just from a retirement income perspective) is:

(i) restore faith in public institutions, including the collection of tax;

(ii) install a modest, universal, PAYG pension, payable to all from a "realistic" retirement age;

(iii) reduce inflation to a level where a net real rate of return is possible over the long term;

(iv) institute reliable disclosure and other formal capital market requirements.

Without items (i), (iii) and (iv), Nigeria shouldn't even think about a Chilean-style system.  With (iii), it probably won't need one.  The 2004 reforms seem to stand only a small chance of success and that will do its own damage.   91