Reforming Pensions in Developing and Transition Countries

Abstract

From a financial and fiscal point of view, pension systems are the larg- est social security programmes among developed and many develop- ing countries, usually accounting for the highest share of public social expenditure, with important impacts on economic growth, redistribu- tion and poverty reduction. Tax-financed social pensions, in particular, have become an important means to protect older persons from poverty and social exclusion. However, while we see them gaining prominence against the backdrop of the Social Protection Floor Initiative and in the run-up to 2015 and beyond, contributory pension insurance tends to outweigh social pension pillars in terms of coverage and funding, espe- cially in middle- and high-income countries. Pension systems have been a policy laboratory since the 1980s. In the era of neoliberalism and structural adjustment, pension policy has seen a paradigmatic change from states to markets. Instead of public pay-as-you- go (PAYG) financed systems based on a generational contract administered by the state, privately managed fully funded pensions (a model first tested in Chile) have been adopted widely as an instrument to foster growth and to minimize the adverse impacts of ageing on public budgets. Public and private pension funds have evolved into powerful institutional investors with considerable market influence. The switch towards capitalization in pension systems in more than 30 countries has exposed social protection systems for elderly people to multiple market risks, as has been forcefully demonstrated by the most recent global economic and financial crisis and its impact on pension fund assets. On the other hand, privatized pension systems have not been insulated from political interventions and even renationalization, as the examples of Argentina, Bolivia and Hungary show.