Reforming Pensions in the Pre and Post COVID-19 worldGustavo Demarco Pensions Global Lead The World...
Transcript of Reforming Pensions in the Pre and Post COVID-19 worldGustavo Demarco Pensions Global Lead The World...
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Gustavo Demarco
Pensions Global Lead
The World Bank
October 2020
Reforming Pensions
in the Pre and Post
COVID-19 world
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Objectives Key Challenges in developing countries
• Low coverage
• Unsustainable
• Regressive
Pension systems pre 2020: objectives and challenges
Economic
Social
Financial
Fairness
Adequacy
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The coverage challenge: informality and exclusion
94.7
91.0
76.1
61.3
39.4
8.9
0.0 20.0 40.0 60.0 80.0 100.0
SSA
SA
EAP
LAC
ECA
Developed
Non-contributor to Pension Scheme(% of labor force)
37.5
34.5
32.5
31.8
16.3
13.8
0.0 10.0 20.0 30.0 40.0
SA
EAP
LAC
SSA
ECA
Developed
Self Employment(% of total employment)
Source: Gatti, R. et al (2014): "Striving for better jobs. Informality in MENA". World Bank.
ECA: Eastern Europe and Central Asia EAP: East Asia and Pacific
LAC: Latin America and the Caribbean SA:South Asia
SSA: Sub-Saharan Africa
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The coverage challenge: non-coverage persists
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40
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60
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80
90
100
0 10 20 30 40 50 60 70 80 90 100
Co
vera
ge r
ate
s in
mid
-2
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0s
Coverage rates in mid-1990s
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Sustainability challenge: The end of the demographic dividend
Mainly due to:
• Increased life expectancy
• Reduced fertility rates
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Sustainability challenge: Parametric inconsistencies
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0 5 10 15 20 25 30 35 40
Acc
rual
Rat
e
Contribution Rate (%)
Retirement Age 55
Qatar
Guatemala
Italy
Iran
SAUDI ARABIA
Kuwait
Central African Republic
Liberia
Djibouti
NetherlandsAustria
Slovenia
TurkeyBahrain
GabonFrance
OmanUAE
Luxembourg
Belgium
Germany
Greece
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Fairness challenge: Pension schemes are (unintentionally?) regressive
• Fiscal support to pension schemes redistribute income from taxpayers to the covered workers
• Benefit formulas based on last salaries benefit those workers with steep income profiles, who are higher income earners and those with highest levels of education
• Early retirement benefits those who can find a new job after retirement. Also usually those with professional background
• Earlier retirement age for women results in lower pensions and amplifies the earning gap between men and women
Age
EarningsReference wage for pension calculation takes the average of the last two years of contributory wages
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… and they often have the wrong incentives• Incentives to:
• Retire at a young age• Under-report wages at early phase in the career (when benefit formula is
based on last salary )
• Lack of incentives:• To seek private sector jobs (preference for public sector in countries where
public sector coverage is higher and pension rules are more generous for civil servants than the private sector)
• For women to participate in the labor force (same vesting period as men, some survivorship pension schemes)
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New challenge: the changing nature of work• Labor markets will evolve towards more flexible jobs and self
employment, for which the contributory Social Insurance schemes have been largely unsuccessful.
• The new digital economy will require adapting the programs designed to traditional employment modalities (wage employment under a single employer);
• To prevent from further reduction of covered population, pension systems will need to rely on a stronger combination of minimum noncontributory pensions (to ensure an extended coverage) and retirement savings or tightly income related DB (to ensure income replacement).
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The digital economy: Adapting Social Protection and Labor policies
• Paradigm shift in Social insurance: driven by • changes in the world of work • technological change
• The paradigm change may imply a greater space for:• Flexible retirement• Savings schemes • Broad-based (targeted) non-contributory minimum benefit• Use of technology for service delivery
• … and a greater need for:• coordination with current Social Assistance programs• IT platforms• Lifelong education
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What might a future social protection policy package look like? (World Bank’s Social Protection White Paper)
Purely voluntary privately financed
“Nudged”, incentivized & privately financed
Mandated & individually
financed
Guaranteed minimum:
Purely publicly financed from
general expenditure
(broadest tax base)
Policy package of protection
Minimum guarantee
• Transfers;• Subsidized
premiums**
Minimal “adequate”
smoothing
N/DC accounts;
Actuarially-fair DB
Default opt-ins;
Information
Regulated market provision of
secure savings & insurance;
Micro finance saving & insurance
Prevents
poverty and
catastrophic
losses
Sufficient to
ensure
income
above the
minimum,
safeguarding
against
moral
hazard
** Replaces contributory minimum guarantees and tax incentives
Digitally
enabled
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The turbulent 2020: COVID challenges for pensions
• Elderly and Persons with disabilities are particularly vulnerable to COVID-19.
• But Pension increases are expensive, and the crisis also affects the continuity of jobs and the ability of many workers and employers to continue paying contributions to Social Insurance programs
• Future pensions may be result lower due to the loss of contributions, early withdrawals and lower returns on pension assets
• Payments and IT systems need to significantly reduce face to face interaction and concentration of beneficiaries;
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Social Insurance: COVID Response
7
8
12
13
51
0 10 20 30 40 50 60
advance payment of pensions
loosening regulations on pensionwithdrawals
administrative & delivery adaptation
pension top-ups
social security contribution reforms
count of countries
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Low-income countries still have a small proportion of pensions paid in bank accounts
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Forward looking
• Compensatory measures: Stronger focus on pension reforms
• Increased focus on different modalities of work (self-employment, flexible work, gig economy)
• Link social insurance programs to improve emergency response to multiple risks
• Faster development and access to IT solutions (payments and service delivery)
• Lifelong learning to support longer careers
• Stronger focus on long term care and active aging