1963-2013 - 50 years of Research for Social Change

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Back | Project: Ageing, Development and Social Protection

Case Study by Armando Barrientos

  • Project from: 2001 to 2003



The 1990s could well qualify as the decade of global pension reform. A number of countries in Latin America and transition economies radically transformed their pension provision, and moved swiftly in the direction of government mandated but privately provided individual retirement plans. The blueprint for pension reform in these countries was provided by Chile's 1981 pension reform, and the World Bank played a key role in supporting and financing this model of pension reform. The Bank's own 1994 report on 'Averting the old age crisis: policies to protect the old and promote growth' raised the profile of ageing as an issue in the context of development policy, although with an unfortunate 'crisis' connotation. While the report recommended developing countries adopted multi-pillar pension systems, with a basic safety net pension, a second-pillar contributory retirement plan, topped by voluntary saving, the Bank focused almost exclusively on supporting second-pillar pension reform. This was rationalised in terms of significant economic advantages including improved work and saving incentives, the strengthening of capital markets, and reduced fiscal deficits.

The OECD's 1998 report 'Maintaining Prosperity in an Ageing Society' reflected a more balanced approach to the policy responses needed to accommodate population ageing. According to this report, pension reform is needed to accommodate population ageing in the context of a wider 'active ageing' framework. More gradual, but no less significant, pension reform is being implemented in developing countries.

Less conspicuous, but very important in the context of development policy, are the experiences of pension reform in the 1990s in South Africa and Brazil. In South Africa, the fall of apartheid led to the extension of basic universal pension benefits to Africans. The 'social pension' provides a regular source of income to elders and their households, and is proving to be a strong instrument for development, by supporting households' economic activity and raising investment in physical and human capital. At the same time, the 'social pension' has led to a significant improvement in the status of elders within their households. In Brazil, a new Constitution adopted in 1988 extended pension entitlements to elders in rural communities and in informal employment. Implemented in 1993, the 'previdencia social' has provided a significant boost to households' economic activity, and has had an important impact on poverty. The experiences of Brazil and South Africa show that universal basic pensions can have a measurable impact on poverty, the well being of elders, and on economic development.

Singapore's Central Provident Fund provides a different model of old age support. Compulsory payroll contributions are collected into a fund, which beneficiaries can use for a range of merit expenditures, including health, housing, and education. The administration of the fund minimises administrative costs.

A comparison of pension schemes in Chile, Singapore, South Africa, and Brazil can yield important lessons for old age support in developing countries. There are, of course, technical issues of design and implementation which a comparison of this sort can illuminate, but the main concern of this paper is to consider the extent to which the different pension schemes provide a model for old age support in developing countries.

The paper will cover, inter alia:

1. The extent to which different pension schemes support income smoothing, redistribution and insurance. Pension schemes perform three key functions. They provide a device for transferring income from work to retirement, they help achieve redistributive objectives in line with social norms, and they provide a range of insurance covering key social risks such as sickness, disability, or the death of the breadwinner. The different pension schemes will be compared in terms of their performance on these three functions.

2. The issue of coverage, both in terms of risks and population. The paper discusses why the introduction of individual retirement plans in Latin America has been accompanied by a reduction in coverage rates.

3. The relative costs of pension schemes. The four countries provide a good contrast on this issue, suggesting that decentralised pension provision with private providers results in a significantly higher level of costs.

4. The political sustainability of the different pension schemes, and the social solidarity values they reflect.

5. The extent to which pensions schemes provide the core component in old age support. The paper will discuss how important is pension income within household income, and the extent to which pension schemes can provide a basis for the development of integrated old age support, including, for example, health and long term care insurance.