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Pensions

Are Second Pillar Pensions Robust in the Face of Economic Shocks?

Mamta Murthi's picture

A view from Central Europe and the Baltics

An elderly Roma woman Saving for old age is important in countries where longevity is increasing. Countries in Central Europe and the Baltics emerged from the economic transition of the 1990s recognizing that they needed to encourage their workforce to retire later and save more in order to be comfortable in old age. To this end, they modified their pay as you go pension systems which collects taxes from workers to pay retirees (the "first pillar") to create an additional or "second pillar" of individual pension accounts funded by taxes. As these second pillar pension accounts were the private property of individual workers, they were expected to encourage saving. Over time as these savings grew, it would be possible to reduce the pensions paid by the government from the first pillar without reducing the standard of living for pensioners who would be able to rely on complementary pensions from their private saving in the second pillar. Typically, a share of payroll tax receipts  was redirected to finance individual pension saving accounts. This resulted in revenue shortfalls in pay as you go you pension schemes, and most governments raised additional debt to meet their obligations which was in turn held by the companies who were managing the pension savings on behalf of employees. However, since the economies were growing rapidly, fiscal deficits were generally kept manageable, easing concerns about additional debt.

Rethinking the household: the impacts of transfers

Markus Goldstein's picture

Two weeks ago, I blogged about some productive impacts of cash transfer programs.   For these effects, as well as the myriad other blog posts and papers on this topic out there, a key point is that the benefits of these transfers extend well beyond the actual individual recipient of the transfer.   
 

Why should governments care about improving their payment programs?

Massimo Cirasino's picture

In Portuguese

In Spanish

Regardless of a country’s stage of economic development, their governments make payments to, and collect payments from individuals and businesses. Financial resources are also transferred between government agencies. These flows cover a wide range of economic sectors and activities, and in most cases, the overall amount of such flows is significant – normally ranging between 15% to about 45% of the GDP.Pensioners can benefit from safer, efficient and more transparent payment programs. (Credit: World Bank)

However, only 25% of low-income countries worldwide process cash transfers and social benefits electronically and this percentage is only slightly higher for public sector salaries and pensions—and this has considerable cost implications. By going electronic, governments can save up to 75% on costs, a significant amount in an era of stretched resources.

Eliminating poverty in old age: are social pensions the answer?

Jean-Jacques Dethier's picture

Poverty in old age is prevalent in a large number of Latin American countries. Universal minimum pensions would be an effective and administratively simple way to substantially reduce poverty among the elder generation.

Photo: © Charlotte Kesl / World Bank
Alleviating poverty in old age requires a different approach from other age groups. Since poverty reduction efforts through labor market or education policies are ineffective, the only available instrument is to directly transfer money so the elderly can purchase goods and services. In rich countries, pension systems transfer money from the rich to the poor and often include a minimum pension that contributes significantly to reducing poverty.  But in developing countries, pension systems have such a low coverage that they cannot deal with old-age poverty.  In Latin America, which has what social scientists call a “truncated welfare state” - with income redistribution for the better-off and exclusion for those in need—most poor people are not covered by pension systems.