Imagine yourself on a comfy seat like the ones they give to ministers. But do not get too cozy as you are about to make a difficult decision. Population is aging in your country, and there simply is not enough resources to finance the pension benefits of the retirees. What should you do?
The conventional wisdom suggests that you should increase the retirement age. The argument goes as follows. People live six years longer in retirement now than half a century ago. Therefore, using some of those additional years for work is not completely unfair. By increasing the retirement age, you could increase the number of contributors while decreasing that of beneficiaries at the same time. This should provide an effective remedy for the imbalances in pension system accounts.
Investing in people starts by ensuring that graduates leave school with strong basic/foundational skills, such as in reading and mathematics. Such skills are critical for subsequent study, for quickly finding a first job, and for adapting to continuous technological change. But are countries in the EU ready to face that challenge?
In the early to mid-1990s, the Moldovan Government often didn’t pay pensions on time – sometimes they were up to two years late. And, they were often paid in-kind. This situation was a syndrome of the trials and tribulations that the country was experiencing in its tumultuous transition to a market economy.
Reform of the pension system was initiated in the late ‘90s to try to fix some of the more pressing challenges by restoring fiscal balance and helping put payments on a sustainable track – essentially meaning that payments were now made in cash, rather than in galoshes or umbrellas.
Similar to Moldova’s protracted transition to a free market, however, the reform of the country’s pension system is largely a story of “unfinished business”. One important reason for this is that the 1998 pension reform envisaged a phased increase in the retirement age up to 65 years for both men and women, and clear linkages between salary contributions and pension payments. This aimed to motivate Moldovans to participate in the system, but after a few years of implementation, the gradual increase in retirement age was put on hold. And, because the retirement age didn’t increase, the planned increase in the value of pensions was put on hold too.
A view from Central Europe and the Baltics
Being busy with everyday life many of us, including myself, do not spend much time thinking how our lives will look like in 20 or 30 years. However, when I travel to the countries I work on, I see the challenges faced by the elderly, especially in rural areas. These challenges include poor access to social and health services, exclusion and simply loneliness.
The countries in Central Europe and the Baltics are ageing. As a result, the size of the working age population is shrinking, creating labor shortages which could potentially challenge future growth. Ageing is also putting government budgets under pressure from the rise in age-related spending on pensions and healthcare, and the shrinking base of tax contributors.
All of this is well known. Less appreciated, however, is the fact that in many countries there is a distinct geographical pattern to ageing. Sparsely populated rural areas are seeing an increasing share of elderly people, while urban areas still attract most of the young generation. The greying of the rural population creates a challenge for public policy as rural municipalities often have fewer resources with which to address the needs of their elderly population.
Recently, while reviewing a document, I came across a statistic about age dependency* in the Republic of Mauritius. Mauritius already had an age dependency ratio of 10.9 in 2010 and this is projected to rise to 25 by 2030 and 37 by 2050, which is at par with many East Asian economies. Aging issues in Europe and parts of Asia have already become an economic and fiscal policy concern over the last few years and will remain so for the foreseeable future, could it also become a problem for Sub-Saharan Africa (SSA) sooner than realized?
With 43 percent of the population below the age of 15 and only three percent above the age of 65, Sub-Saharan Africa is a predominantly young continent. The problems emanating from an ageing population, such as rising age dependency ratios and increasing health care costs, are far over the horizon as far as the continent is concerned. However, this may not remain so for long and definitely not for all the countries. Let me explain why.
A typical Ugandan woman gives birth to an average of seven children, far higher than for other countries, including neighboring Kenya and Tanzania. There are many factors that push Ugandan woman to give birth to many children. For instance, low levels of schooling of women in Uganda often result in early marriage and early pregnancy. Inadequate access to family planning services, as well as cultural pressures that reward women for having many children, also contribute to Uganda’s high fertility rates. However, another important reason for Uganda’s high prolificacy is that children are a way of ensuring parents are taken care of after when they retire from active employment and can no longer fend for their livelihood. This incentive is particularly acute due to the fact that the Uganda pension system does not reach the majority of the country’s population. Today, although the elderly are still few in numbers (i.e., less than 5 percent of the population), only 2 percent of them are receiving a pension. Children are therefore perceived as a form of pension to many Ugandans because the majority of the population is not covered by any other system of protection.
A view from Central Europe and the Baltics
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.
Mariano Bosch, Carmen Pages, and Angel Melguizo at the Inter-American Development Bank (IDB) are proposing a new approach to expanding the coverage of pension systems in Latin America while helping create more and better jobs. Their ideas are spelled out in a new book "Better Pensions, Better Jobs: Towards Universal Coverage in Latin America and the Caribbean." The book is about Latin America but the problems discussed and proposed solutions are relevant for any middle-income country. I think the IDB's proposal is a great contribution to the debate on pension reform. Below I discuss some of the points they make that I agree with and those where I think other options could be considered.