The pensions crisis is a predicted difficulty in paying for corporate, state, and federal pensions in

the United States and Europe, due to a difference between pension obligations and the resources
set aside to fund them. Shifting demographics are causing a lower ratio of workers per retiree;
contributing factors include retirees living longer (increasing the relative number of retirees), and
lower birth rates (decreasing the relative number of workers, especially relative to the Post-WW2
Baby Boom). There is significant debate regarding the magnitude and importance of the problem, as
well as the solutions.[1]
For example, as of 2008, the estimates for the underfunding of the United States state pension
programs range from $1 trillion using the discount rate of 8% to $3.23 trillion using U.S. Treasury
bond yields as the discount rate.[2][3] The present value of unfunded obligations under Social
Security as of August 2010 was approximately $5.4 trillion. In other words, this amount would have
to be set aside today such that the principal and interest would cover the program's shortfall between
tax revenues and payouts over the next 75 years. [4]
Some economists question the concept of funding, and, therefore underfunding. Storing funds by
governments, in the form of fiat currencies, is the functional equivalent of storing a collection of their
own IOUs. They will be equally inflationary to newly written ones when they do come to be used. [5]
Reform ideas are in three primary categories: a) Addressing the worker-retiree ratio, via raising the
retirement age, employment policy and immigration policy; b) Reducing obligations via shifting from
defined benefit to defined contribution pension types and reducing future payment amounts (by, for
example, adjusting the formula that determines the level of benefits); and c) Increasing resources to
fund pensions via increasing contribution rates and raising taxes.

Background[edit]
The ratio of workers to pensioners (the "support ratio") is declining in much of the developed world.
This is due to two demographic factors: increased life expectancy coupled with a fixed retirement
age, and a decrease in the fertility rate. Increased life expectancy (with fixed retirement age)
increases the number of retirees at any time, since individuals are retired for a longer fraction of their
lives, while decreases in the fertility rate decrease the number of workers.
In 1950, there were 7.2 people aged 2064 for every person of 65 or over in the OECD countries. By
1980, the support ratio dropped to 5.1 and by 2010 it was 4.1. It is projected to reach just 2.1 by
2050. The average ratio for the EU was 3.5 in 2010 and is projected to reach 1.8 by 2050.
[6]

Examples of support ratios for selected countries in 1970, 2010, and projected for 2050: [1]
Country

1970

2010

2050 (projected)

United States

5.3

4.5

2.6

Japan

8.5

2.6

1.2

Britain

4.3

3.6

2.4

Germany

4.1

3.0

1.6

France

4.2

3.5

1.9

Netherlands

5.3

4.0

2.1

Pension computations[edit]
Pension computations are often performed by actuaries using assumptions regarding current and
future demographics, life expectancy, investment returns, levels of contributions or taxation, and
payouts to beneficiaries, among other variables. One area of contention relates to the expected
investment return rate. If this rate (expressed as a percentage) is increased, relatively lower
contributions are demanded of those paying into the system. Critics have argued that investment
return percentage rate assumptions are artificially inflated, to reduce the required contribution
amounts by individuals and governments paying into the pension system. For example, the U.S.
stock market (adjusted for inflation) did not have a sustained increase in value between 2000 and
2010. However, many pensions have annual investment return assumptions or estimates in the 7
8% range, which are closer to the pre-2000 average return. If these rates were lowered 12
percentage points, the required pension contributions taken from salaries or via taxation would
increase dramatically. By one estimate, each 1 point reduction means 10% more in contributions.
For example, if a pension program reduced its investment return rate assumption from 8% to 7%, a
person contributing $100 per month to their pension would be required to contribute $110.
Attempting to sustain better-than-market returns can also cause portfolio managers to take on more
risk.[7]

The International Monetary Fund reported in April 2012 that developed countries may be
underestimating the impact of longevity on their public and private pension calculations. The IMF
estimated that if individuals live three years longer than expected, the incremental costs could
approach 50% of 2010 GDP in advanced economies and 25% in emerging economies. In the United
States, this would represent a 9% increase in pension obligations. The IMF recommendations
included raising the retirement age commensurate with life expectancy.[8]

United States[edit]
U.S. Social Security program[edit]

Social Security - Ratio of Covered Workers to Retirees

Main article: Social Security debate (United States)

The number of U.S. workers per retiree was 5.1 in 1960; this declined to 3.0 in 2009 and is projected
to decline to 2.1 by 2030.[9] The number of Social Security program recipients is expected to increase
from 44 million in 2010 to 73 million in 2030.[10] The present value of unfunded obligations under
Social Security as of August 2010 was approximately $5.4 trillion. In other words, this amount would
have to be set aside today such that the principal and interest would cover the shortfall over the next
75 years.[4] The Social Security Administration projects that an increase in payroll taxes equivalent to
1.9% of the payroll tax base or 0.7% of GDP would be necessary to put the Social Security program
in fiscal balance for the next 75 years. Over an infinite time horizon, these shortfalls average 3.4% of
the payroll tax base and 1.2% of GDP.[11]

U.S. State-level issues[edit]

In financial terms, the crisis represents the gap between the amount of promised benefits and the
resources set aside to pay for them. For example, many U.S. states have underfunded pensions,
meaning the state has not contributed the amount estimated to be necessary to pay future
obligations to retired workers. The Pew Center on the States reported in February 2010 that states
have underfunded their pensions by nearly $1 trillion as of 2008, representing the gap between the

$2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion
price tag of those promises.[2]
The Center on Budget and Policy Priorities (CBPP) reported in January 2011 that:

As of 2010, the state pension shortfall ranges between $700 billion and $3 trillion, depending
on the discount rate used to value the future obligations. The $700 billion figure is based on
using a discount rate in the 8% range representative of historical pension fund investment
returns, while the $3 trillion represents a discount rate in the 5% range representative of
historical Treasury bond ("risk-free") yields.[12]

This shortfall emerged after the year 2000, substantially due to tax revenue declines from
two recessions.

States contribute approximately 3.8% of their operating budgets to their pension programs
on average. This would have to be raised to 5.0% to cover the $700 billion shortfall and around
9.0% to cover the $3 trillion shortfall.

Certain states (e.g., Illinois, California, and New Jersey) have significantly underfunded their
pension plans and would have to raise contributions towards 79% of their operating budgets,
even under the more aggressive 8% discount rate assumption.

States have significant time before the pension assets are exhausted. Sufficient funds are
present already to pay obligations for the next 1520 years, as many began funding their
pensions back in the 1970s. The CBPP estimates that states have up to 30 years to address
their pension shortfalls.

States accumulated more than $3 trillion in assets between 1980 and 2007 and there is
reason to assume they can and will do that again, as the economy recovers.

Nearly all debt issued by a state (generally via bonds) is used to fund its capital budget, not
its operating budget. Capital budgets are used for infrastructure like roads, bridges and schools.
Operating budgets pay pensions, salaries, rent, etc. So state debt levels related to bond
issuance and the funding of pension obligations have substantially remained separate issues up
to this point.

State debt levels have ranged between 12% and 18% of GDP between 1979 and 2009.
During the second quarter of 2010, the debt level was 16.7%.

State interest expenses remains a "modest" 4%-5% of all state/local spending.

Pension promises are contractually binding. In many states, constitutional amendments are
also required to modify them.[13]

The pension replacement rate, or percentage of a worker's pre-retirement income that the pension
replaces, varies widely from state to state. It bears little correlation to the percentage of state
workers who are covered by a collective bargaining agreement. For example, the replacement rate
in Missouri is 55.4%, while in New York it is 77.1%. In Colorado, replacement rates are higher but
these employees are barred from participating in Social Security.[14]
The Congressional Budget Office reported in May 2011 that "most state and local pension plans
probably will have sufficient assets, earnings, and contributions to pay scheduled benefits for a
number of years and thus will not need to address their funding shortfalls immediately. But they will
probably have to do so eventually, and the longer they wait, the larger those shortfalls could
become. Most of the additional funding needed to cover pension liabilities is likely to take the form of
higher government contributions and therefore will require higher taxes or reduced government
services for residents".[15]

U.S. city and municipality pensions[edit]

In addition to states, U.S. cities and municipalities also have pension programs. There are 220 state
pension plans and approximately 3,200 locally administered plans. By one measure, the unfunded
liabilities for these programs are as high as $574 billion. The term unfunded liability represents the
amount of money that would have to be set aside today such that interest and principal would cover
the gap between program cash inflows and outflows over a long period of time. On average,
pensions consume nearly 20 percent of municipal budgets. But if trends continue, over half of every
dollar in tax revenue would go to pensions, and by some estimates in some instances up to 75
percent.[16][17]
As of early 2013, several U.S. cities had filed for bankruptcy protection under federal laws and were
seeking to reduce their pension obligations. In some cases, this might contradict state laws, leading
to a set of constitutional questions that might be addressed by the U.S. Supreme Court.[18]

Shift from defined benefit to defined contribution pensions[edit]

The Social Security Administration reported in 2009 that there is a long-term trend of pensions
switching from defined benefit (DB) (i.e., a lifetime annuity typically based on years of service and
final salary) to defined contribution (DC) (e.g., 401(k) plans, where the worker invests a certain
amount, often with a match from the employer, and can access the money upon retirement or under
special conditions.) The report concluded that: "On balance, there would be more losers than
winners and average family incomes would decline. The decline in family income is expected to be
much larger for last-wave boomers born from 1961 to 1965 than for first-wave boomers born from
1946 to 1950, because last-wave boomers are more likely to have their DB pensions frozen with
relatively little job tenure."[19]

The percentage of workers covered by a traditional defined benefit (DB) pension plan declined
steadily from 38% in 1980 to 20% in 2008. In contrast, the percentage of workers covered by a
defined contribution (DC) pension plan has been increasing over time. From 1980 through 2008, the
proportion of private wage and salary workers participating in only DC pension plans increased from
8% to 31%. Most of the shift has been the private sector, which few changes in the public sector.
Some experts expect that most private-sector plans will be frozen in the next few years and
eventually terminated. Under the typical DB plan freeze, current participants will receive retirement
benefits based on their accruals up to the date of the freeze, but will not accumulate any additional
benefits; new employees will not be covered. Instead, employers will either establish new DC plans
or increase contributions to existing DC plans.[19]
Employees in unions are more likely to be covered by a defined benefit plan, with 67% of union
workers covered by such a plan during 2011 versus 13% of non-union workers. [20]
Economist Paul Krugman wrote in November 2013: "Today, however, workers who have any
retirement plan at all generally have defined-contribution plansbasically, 401(k)'sin which
employers put money into a tax-sheltered account that's supposed to end up big enough to retire on.
The trouble is that at this point it's clear that the shift to 401(k)'s was a gigantic failure. Employers
took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower
than workers were told to expect; and, to be fair, many people haven't managed their money wisely.
As a result, we're looking at a looming retirement crisis, with tens of millions of Americans facing a
sharp decline in living standards at the end of their working lives. For many, the only thing protecting
them from abject penury will be Social Security."[21][22]
A 2014 Gallup poll indicated that 21% of investors had either taken an early withdrawal of their
401(k) defined contribution retirement plan or a loan against it over the previous five years. [23] Fidelity
Investments reported in February 2014 that:

The average 401(k) balance reached a record $89,300 in the fourth quarter of 2013, a 15.5%
increase over 2012 and almost double the low of $46,200 set in 2009 (which was affected by
the Great Recession).

The average balance for persons 55 and older was $165,200.

Approximately one-third (35%) of all 401(k) participants cashed out their accounts when they
left their jobs in 2013, which can cost investors in terms of penalties and taxes. [24]

Solutions[edit]
Reform ideas are in three primary categories: a) Addressing the worker-retiree ratio, via raising the
retirement age, employment policy, and immigration policy; b) Reducing obligations via shifting from
defined benefit to defined contribution pension types and reducing future payment amounts; and c)

Increasing resources to fund pensions via increasing contribution rates and raising taxes. Recently
the latter has included proposals for and actual confiscation of private pension plans and merging
them into government run plans.[25]
Proposed solutions to the pensions crisis include ones that address the dependency ratio later
retirement, part-time work by the aged, encouraging higher birth rates, or immigration of working
aged persons and ones that take the dependency ratio as given and address the finances
higher taxes, reductions in benefits, or the encouragement or reform of private saving.
In the United States, since 1979 there has been a significant shift away from defined benefit plans
with a corresponding increase in defined contribution plans, like the 401(k). In 1979, 62% of private
sector employees with pension plans of some type were covered by defined benefit plans, with
about 17% covered by defined contribution plans. By 2009, these had reversed to approximately 7%
and 68%, respectively. As of 2011, governments were beginning to follow the private sector in this
regard.[26]
Research indicates that employees save more if they are automatically enrolled in savings plans
(i.e., enrolled and given an option to drop out, as opposed to being required to take action to opt into
the plan). Some countries have laws that require employers to opt employees into defined
contribution plans.[26]

Criticisms[edit]
Other sources of income[edit]
Some claim[who?] that the pensions crisis does not exist or is overstated, as pensioners in developed
countries faced with population aging are often able to unlock considerablehousing wealth and make
returns from other investments or employment.

Demographic transition[edit]

[citation needed][dead link]

Inverse dependency ratio (workers per dependent) by world regions, 19502050, notably showing

demographic windows in the US and East Asia.

Some argue (FAIR 2000) that the crisis is overstated, and for many regions there is no crisis,
because the total dependency ratio composed of aged and youth is simply returning to long-term

norms, but with more aged and fewer youth: looking only at aged dependency ratio is only one half
of the coin. The dependency ratio is not increasing significantly, but rather its composition is
changing.
In more detail: as a result of the demographic transition from "short-lived, high birth-rate" society to
"long-lived, low birth-rate" society, there is a demographic window when an unusually high portion of
the population is working age, because first death rate decreases, which increases the working age
population, then birth rate decreases, reducing the youth dependency ratio, and only then does the
aged population grow. The decreased death rate having little effect initially on the population of the
aged (say, 60+) because there are relatively few near-aged (say, 5060) who benefit from the fall in
death rate, and significantly more near-working age (say, 1020) who do. Once the aged population
grows, the dependency ratio returns to approximately the same level it was prior to the transition.
Thus, by this argument, there is no pensions crisis, just the end of a temporary golden age, and
added costs in pensions are recovered by savings in paying for youth.
However, if a country's fertility rate falls too far below replacement level, in future there will be
unusually few workers supporting the still large retiree population, and the dependency ratio will rise
above historical levels, possibly causing an actual crisis.[citation needed]
A complicating factor is that support for the youth and support for the aged may be provided by
different agents, funded in different ways, making the hand off difficult. For example in the United
States, care for the youth is provided by parents, with the primary government expense being
education, which is primarily provided by local and state governments, paid for by property taxes (a
form of wealth tax), while care for the aged is commonly provided by hospitals and nursing homes,
and the expenses are pensions and health care, which are provided by the federal government, paid
for by payroll taxes (a form of income tax). Thus, local property taxes and the untaxed labor of
parents cannot be directly handed off to fund pensions and health care, creating a coordination
problem.[citation needed]
Visual explanation[edit]

Population pyramids; dependency ratio is approximately equal in Stage 1 and Stage 3, but composition differs
youth in Stage 1, aged in Stage 3

Visually, in a classic population pyramid (Stage 1 and 2), the base (youth) is wide, and the peak
(aged) is short and narrow. As the population ages, it passes through the demographic window (not
pictured) where the pyramid is almost vertical from youth through working age, then tapers in the

aged. Once the population has passed through the window and stabilized (Stage 3), youth is less
significant (because much slower taper, so a smaller fraction), but aged are more significant
(because taller and wider) however, the overall dependency ratio is roughly the same in both
cases.[27]
If, however, the birthrate falls below replacement level, then the bottom shrinks, and as this baby
bust works up the pyramid, a narrower base of workers supports a still-large peak of aged, and the
dependency ratio does increase; this is particularly the case if there is a sharp (sudden, significant)
drop in fertility rate.

Key terms[edit]

Support ratio: The number of people of working age compared with the number of people
beyond retirement age

Participation rate: The proportion of the population that is in the labor force

Defined benefit: A pension linked to the employee's salary, where the risk falls on the
employer to pay a contractual amount

Defined contribution: A pension dependent on the amount contributed and related investment
performance, where the risk falls mainly on the employee[1]

Pensions crisis: Millions are saving

too little to avoid poverty in old age
BRITAIN faces a pensions timebomb after it emerged almost half the workforce is saving
nothing for retirement.
By GILES SHELDRICK

PUBLISHED: 00:01, Mon, Sep 14, 2015

GETTY

Millions of Brits are facing a pension crisis when they get older

The poor state of personal finances is laid bare in figures showing a generation sleepwalking
towards an impoverished old age.
Latest research shows the average worker saves 1.72 a day, less than the cost of a cup of coffee.
Yet 45 per cent of working adults 13.5 million people refuse to put any money at all to one side.
Worryingly, this figure is higher, at 49 per cent, among 18 to 34-year-olds.
The crisis is blamed on a destructive live for today mentality.

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Experts warned last night that the pension system faced meltdown unless drastic action was taken.
It comes as a third of savers have given up the prospect of retiring for more than five years with 16
per cent resigned to working until they drop.

It shouldnt be left until the end of the month to see whats left, a direct debit
should come out at the start of each month
Steve Carlson, of Carlson Wealth Management Ltd
David Harrison, managing partner of financial services firm True Potential which carried out the
research, said: We live in an impulse debt culture but we need to impulse save instead.
The fact that many people choose to spend on coffee rather than their retirement funds points to a
culture of complacency.

The independent consumer survey found just 51 is invested in retirement funds each month on
average.
The study of 2,000 people revealed those aged between 25 and 34 were the most complacent,
blowing 75.90 a month on impulse purchases.
The average worker built up 1,272 of debt in the past three months, with 56 per cent saying it was
easier to get credit now than it was 10 years ago.
The Governments automatic enrolment scheme started in 2012 with the aim of helping people save
to top up the paltry state pension.

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But 67 per cent of those quizzed in the audit were not yet enrolled.
Steve Carlson, managing director of Carlson Wealth Management Ltd, said saving for retirement
should be viewed as essential.
He said: It shouldnt be left until the end of the month to see whats left, a direct debit should come
out at the start of each month.
Pensions minister Baroness Altmann said: I am concerned to ensure more people understand the

value of saving for later. While the state pension system can provide a safety net, most people
wanting to maintain their living standards into old age will need a private provision."
The pension nightmare that is at the heart of the horrific financial crisis in Detroit is just
the tip of the iceberg of the coming retirement crisis that will shake America to the core.
Right now, more than 10,000 Baby Boomers are hitting the age of 65 every single day,
and this will continue to happen every single day until the year 2030. As a society, we have
made trillions of dollars of financial promises to these Baby Boomers, and there is no way
that we are going to be able to keep those promises. The money simply is not there. Yes, I
suppose that we could eventually see a super devaluation of the U.S. dollar and keep our
promises to the Baby Boomers using currency that is not worth much more than Monopoly
money, but as it stands right now we simply do not have the resources to do what we said
that we were going to do. The number of senior citizens in the United States is projected to
more than double by the middle of the century, and it would have been nearly impossible to
support them all even if we werent in the midst of a long-term economic decline. Tens
of millions of Americans that are eagerly looking forward to retirement are going to be in for
a very rude awakening in the years ahead. There is going to be a lot of heartache and a lot
of broken promises.
What is going on in Detroit right now is a perfect example of what will soon be happening all
over the nation. Many city workers stuck with their jobs for decades because of the promise
of a nice pension at the end of the rainbow. But now those promises are going up in smoke.
There has even been talk that retirees will only end up getting about 10 cents for every
dollar that they were promised.
Needless to say, many pensioners are extremely angry that the promises that were made to
them are not going to be kept. The following is from a recent article in the New York
Times
Many retirees see the plan to cut their pensions as a betrayal, saying that they kept their
end of a deal but that the city is now reneging. Retired city workers, police officers and 911
operators said in interviews that the promise of reliable retirement income had helped draw
them to work for the City of Detroit in the first place, even if they sometimes had to accept
smaller salaries or work nights or weekends.
Does Detroit have a problem? asked William Shine, 76, a retired police sergeant.
Absolutely. Did I create it? I dont think so. They made me some promises, and I made them
some promises. I kept my promises. Theyre not going to keep theirs.
But Detroit is far from an isolated case. As Detroit Mayor Dave Bing said the other day,
many other cities are heading down the exact same path
We may be one of the first. We are the largest. But we absolutely will not be the last.
Yes, Detroits financial problems are immense. But other major U.S. cities are facing
unfunded pension liabilities that are even worse.
For example, here are the unfunded pension liabilities for four financially-troubled large
U.S. cities
Detroit: $3.5 billion
Baltimore: $680 million

Los Angeles: $9.4 billion

Chicago: $19 billion
When you break it down on a per citizen basis, Detroit is actually in better shape than the
others
Detroit: $7,145
Baltimore: $7,247
Los Angeles: $8,437
Chicago: $13,355
And many state governments are in similar shape. Right now, the state of Illinois has
unfunded pension liabilities that total approximately $100 billion.
There are some financial journalists out there that are attempting to downplay this
problem, but sticking our heads in the sand is not going to make any of this go away.
According to Northwestern University Professor John Rauh, the total amount
ofunfunded pension and healthcare obligations for retirees that state and local
governments across the United States have accumulated is 4.4 trillion dollars.
So where are they going to get that money?
They are going to raise your taxes of course.
Just check out what is happening right now in Scranton, Pennsylvania
Scranton taxpayers could face a 117 percent increase in taxes next year as the citys
finances continue to spiral out of control.
A new analysis by the Pennsylvania Economy League projects an $18 million deficit for 2014,
an amount so massive it outpaces the approximate $17 million the struggling city collects
annually
A 117 percent tax increase?
What would Dwight Schrute think of that?
Perhaps you are reading this and you are assuming that your retirement is secure because
you work in the private sector.
Well, just remember what happened to your 401k during the financial crisis of 2008. During
the next major stock market crash, your 401k will likely get absolutely shredded. Many
Americans will probably see the value of their 401k accounts go down by 50 percent or
more.
And if you have stashed your retirement funds with the wrong firm, you could end up
losing everything. Just ask anyone that had their nest eggs invested with MF Global.

But of course most Americans are woefully behind on saving for retirement anyway. A study
conducted by Boston Colleges Center for Retirement Research found that American
workers are $6.6 trillion short of what they need to retire comfortably.
That certainly isnt good news.
On top of everything else, the federal government has been recklessly irresponsible as far as
planning for the retirement of the Baby Boomers is concerned.
As I noted yesterday, the U.S. government is facing a total of 222 trillion dollars in
unfunded liabilities. Social Security and Medicare make up the bulk of that.
At this point, the number of Americans on Medicare is projected to grow from a little bit more
than 50 million today to 73.2 million in 2025.
The number of Americans collecting Social Security benefits is projected to grow from about
56 million today to 91 million in 2035.
How is a society with a steadily declining economy going to care for them all adequately?
Yes, we truly are careening toward disaster.
If you are not convinced yet, here are some more numbers. The following stats are from one
of my previous articles entitled Do You Want To Scare A Baby Boomer?
1. Right now, there are somewhere around 40 million senior citizens in the United States.
By 2050 that number is projected to skyrocket to 89 million.
2. According to one recent poll, 25 percent of all Americans in the 46 to 64-year-old age
bracket have no retirement savings at all.
3. 26 percent of all Americans in the 46 to 64-year-old age bracket have no personal
savings whatsoever.
4. One survey that covered all American workers found that 46 percent of them have less
than $10,000 saved for retirement.
5. According to a survey conducted by the Employee Benefit Research Institute, 60
percent of American workers said the total value of their savings and investments is less
than $25,000.
6. A Pew Research survey found that half of all Baby Boomers say that their household
financial situations have deteriorated over the past year.
7. 67 percent of all American workers believe that they are a little or a lot behind schedule
on saving for retirement.
8. Today, one out of every six elderly Americans lives below the federal poverty line.
9. More elderly Americans than ever are finding that they must continue working once they
reach their retirement years. Between 1985 and 2010, the percentage of Americans in the
65 to 69-year-old age bracket that were still working increasedfrom 18 percent to 32
percent.

10. Back in 1991, half of all American workers planned to retire before they reached the age
of 65. Today, that number has declined to 23 percent.
11. According to one recent survey, 70 percent of all American workers expect to continue
working once they are retired.
12. According to a poll conducted by AARP, 40 percent of all Baby Boomers plan to work
until they drop.
13. A poll conducted by CESI Debt Solutions found that 56 percent of American retirees still
had outstanding debts when they retired.
14. Elderly Americans tend to carry much higher balances on their credit cards than younger
Americans do. The following is from a recent CNBC article
New research from the AARP also shows that those ages 50 and over are carrying higher
balances on their credit cards $8,278 in 2012 compared to $6,258 for the under-50
population.
15. A study by a law professor at the University of Michigan found that Americans that are
55 years of age or older now account for 20 percent of all bankruptcies in the United
States. Back in 2001, they only accounted for 12 percent of all bankruptcies.
16. Between 1991 and 2007 the number of Americans between the ages of 65 and 74 that
filed for bankruptcy rose by a staggering 178 percent.
17. What is causing most of these bankruptcies among the elderly? The number one cause
is medical bills. According to a report published in The American Journal of Medicine,
medical bills are a major factor in more than 60 percent of the personal bankruptcies in
the United States. Of those bankruptcies that were caused by medical bills, approximately
75 percent of them involved individuals that actually did have health insurance.
18. In 1945, there were 42 workers for every retiree receiving Social Security benefits.
Today, that number has fallen to 2.5 workers, and if you eliminate all government workers,
that leaves only 1.6 private sector workers for every retiree receiving Social Security
benefits.
19. Millions of elderly Americans these days are finding it very difficult to survive on just a
Social Security check. The truth is that most Social Security checks simply are not that
large. The following comes directly from the Social Security Administration website
The average monthly Social Security benefit for a retired worker was about $1,230 at the
beginning of 2012. This amount changes monthly based upon the total amount of all
benefits paid and the total number of people receiving benefits.
You can view the rest of the statistics right here.
Sadly, most Americans are not aware of these things.
The mainstream media keeps most of the population entertained with distractions. This
week it is the birth of the royal baby, and next week it will be something else.
Meanwhile, our problems just continue to get worse and worse.

There is no way in the world that we are going to be able to keep all of the financial
promises that we have made to the Baby Boomers. A lot of them are going to end up
bitterly disappointed.
All of this could have been avoided if we would have planned ahead as a society.
But that did not happen, and now we are all going to pay the price for it.
Tags: America, Baby Boomers, Economic Decline, Financial, Financial Crisis,Financial
Promises, Looking Foward To Retirement, Michael T. Snyder, Pension,Pension Crisis, Pension
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22 Statistics About Americas Coming

Pension Crisis That Will Make You Lose
Sleep At Night

As the first of the 80 million Baby Boomers have

begun to retire, it has become increasingly apparent that the United States is facing a
pension crisis of unprecedented magnitude. State and local government pension plans are
woefully underfunded, dozens of large corporate pension plans either have collapsed or are
on the verge of collapsing, Social Security is a complete and total financial disaster and
about half of all Americans essentially have nothing saved up for retirement. So yes, to say
that we are facing a retirement crisis would be a tremendous understatement. There is
simply no way that we can keep all of the financial promises that we have made to the Baby
Boomer generation. Unfortunately, the crumbling U.S. economy simply cannot support the
comfortable retirement of tens of millions of elderly Americans any longer. The truth is that
we are all going to have to start fundamentally changing the way that we think about our
golden years.
Once upon a time, you could count on getting a big, fat pension if you put 30 years into a
job. But now pension plans everywhere are failing. State and local governments are cutting

back and are raising retirement ages. A majority of Americans have even lost faith in the
Social Security system, which was supposed to be the most secure of them all.
The reality is that we are moving into a time when there is not going to be such a thing as
financial security as we have known it in the past. Things have fundamentally changed,
and we are all going to have to struggle to stay above water in the economic nightmare that
is coming.
Part of the reason we have such a gigantic economic mess on the way is because we have
promised vastly more than we can deliver to future retirees. When you closely examine the
numbers, it quickly becomes clear that a financial tsunami is about to hit us that is going to
be so devastating that it will change everything that we know about retirement.
The following are 22 statistics about Americas coming pension crisis that will make you lose
sleep at night.
Private Pension Plans And Retirement Funds
1 One recent study found that Americas 100 largest corporate pension plans were
underfunded by $217 billion at the end of 2008.
2 Approximately half of all workers in the United States have less than $2000saved up
for retirement.
3 According to one recent survey, 36 percent of Americans say that they dont
contribute anything at all to retirement savings.
4 The Pension Benefit Guaranty Corporation says that the number of pensions at risk
inside failing companies more than tripled during the recession.
5 According to another recent survey, 24% of U.S. workers admit that they have
postponed their planned retirement age at least once during the past year.
State And Local Government Pensions
6 Pension consultant Girard Miller recently told Californias Little Hoover Commission that
state and local government bodies in the state of California have$325 billion in combined
unfunded pension liabilities. When you break that down, it comes to $22,000 for every
single working adult in California.
7 According to a recent report from Stanford University, Californias three biggest pension
funds are as much as $500 billion short of meeting future retiree benefit obligations.
8 In New Jersey, the governor has proposed not making the states entire $3 billion
contribution to its pension funds because of the states $11 billion budget deficit.
9 It has been reported that the $33.7 billion Illinois Teachers Retirement Systemis 61%
underfunded and is on the verge of total collapse.
10 The state of Illinois recently raised its retirement age to 67 and capped the salary
on which public pensions are figured.
11 The state of Virginia is requiring employees to pay into the state pension fundfor the
first time ever.

12 In New York City, annual pension contributions have increased sixfold in the
past decade alone and are now so large that they would be able to finance entire new
police and fire departments.
13 Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwesterns
Kellogg School of Management recently calculated the combined pension liability for all 50
U.S. states. What they found was that the 50 states are collectively facing $5.17 trillion in
pension obligations, but they only have $1.94 trillion set aside in state pension funds. That
is a difference of 3.2 trillion dollars.
Social Security
14 According to one recently conducted poll, 6 out of every 10 non-retirees in the United
States believe that the Social Security system will not be able to pay them
benefits when they stop working.
15 A very large percentage of the federal budget is made up of entitlement programs such
as Social Security and Medicare that cannot be reduced without a change in the
law. Approximately 57 percent of Barack Obamas 3.8 trillion dollar budget for 2011
consists of direct payments to individual Americans or is money that is spent on their behalf.
16 35% of Americans over the age of 65 rely almost entirely on Social Security payments
alone.
17 According to the Congressional Budget Office, the Social Security system will pay out
more in benefits than it receives in payroll taxes in 2010. That was not supposed to
happen until at least 2016. The Social Security deficits are projected to get increasingly
worse in the years ahead.
18 56 percent of current retirees believe that the U.S. government will eventually cut
their Social Security benefits.
19 In 1950, each retirees Social Security benefit was paid for by 16 U.S. workers. In
2010, each retirees Social Security benefit is paid for by approximately 3.3 U.S. workers.
By 2025, it is projected that there will be approximately two U.S. workers for each
retiree.
20 The shortfall in entitlement programs in the years ahead is mind blowing. The present
value of projected scheduled benefits surpasses earmarked revenues for entitlement
programs such as Social Security and Medicare by about 46 trillion dollars over the next
75 years.
21 According to a recent U.S. government report, soaring interest costs on the U.S.
national debt plus rapidly escalating spending on entitlement programs such as Social
Security and Medicare will absorb approximately 92 cents of every single dollar of federal
revenue by the year 2019. That is before a single dollar is spent on anything else.
22 Right now, interest on the U.S. national debt and spending on entitlement programs like
Social Security and Medicare is somewhere in the neighborhood of 15 percent of GDP. By
2080, those combined expenditures are projected to eat up approximately 50 percent of
GDP.
The Pension Section Council also took the opportunity to do some reflection at a recent meeting. The council
conducted a SWOT analysis of the Pension Section. For those of you not familiar with the term, SWOT stands for

strengths, weaknesses, opportunities and threats. I'm sure each and every person reading this article would have
interesting insights into the SWOT analysis as it applies to the Pension Section, and needless to say, so did the
Pension Section Council members. While I don't have room in this article to share all the discussions, I will highlight
some of the consensus points.
Some of the key strengths that we see in the Pension Section are the SOA's rigorous credentialing along with a
positive public perception of actuaries in the pension area. In addition, the Pension Section has released a substantial
amount of research that is current/leading edge and relevant and has sponsored a number of unique education
sessions for pension actuaries through both the SOA Annual Meeting and multiple webcasts each year. The facts that
pension actuaries typically have a variety of business skills and help manage numerous risks were also seen as key
strengths.
A lot of the discussion of weaknesses centered on the volunteer nature of our organization. As you may or may not be
aware, most of the work that the Pension Section does is spearheaded by numerous volunteers. We continue to
struggle with too few volunteers, often spread too thin. In some cases, volunteers may have a perceived conflict of
interest between their company objectives and the work of the Pension Section. Another weakness that garnered a
fair amount of attention was the lack of awareness of the SOA research along with the theoretical nature of some of
that work. There was also some concern regarding the need for better understanding of mortality and longevity issues
both in and out of our profession.
There was no shortage of threats identified for pensions. It is no surprise that the government deficits and potential
cuts to retirement benefit expenditures is a major concern. The state of underfunding and volatility of funding for
defined benefit plans also threatens the remaining open plans. Actuaries in general, and pension actuaries in
particular, have a reputation for making things overly complicated and perhaps have limited our abilities to expand
into other areas. The Pension Section itself has been losing people to other professions and areas of interest.
Despite all the discussion of the weaknesses and threats, we believe that there are a lot of opportunities for our
section. We believe that the current retirement crisis along with public plan issues can be leveraged to influence
public policy. In some cases, we have opportunities to learn from parallel issues in other parts of the world. For
instance, the United Kingdom seems to be a little ahead of where we are in the United States regarding pension
issuesparticularly on their analysis of longevity issues. We believe that the Pension Section would benefit from a
"plain language" translation of the research that has been completed along with ideas for practical application. There
are opportunities to expand the work that pension actuaries do by focusing on individuals' retirement needs, finding
ways to transfer our skills to DC consulting and educating the public on retirement risks and financial literacy.
The Pension Section Council has taken the results of this SWOT analysis under consideration, and we are analyzing
ways that we can either attack our weaknesses and threats or take advantage of the strengths and opportunities that
exist. I look forward to sharing our progress in these efforts in future articles.

https://www.soa.org/News-and-Publications/Newsletters/Pension-SectionNews/2012/february/Chairperson-s-Corner.aspx

The 'crisis' in defined benefit corporate pension liabilities Part II:

Current solutions and future prospects
Gordon L Clark1 and Ashby H B Monk2
Correspondence: Ashby Monk, Oxford University Centre for the Environment, South Parks Rd., Oxford OX1 3QY, UK. Email:ashby.monk@chch.ox.ac.uk
is the Halford Mackinder Professor of Geography at the University of Oxford and Professorial Fellow of St Peter's College, Oxford. He is also a senior
research fellow at Harvard University's Labor and Worklife Program. The author of Pensions and Corporate Restructuring in American Industry(Johns
Hopkins University Press 1993), Pension Fund Capitalism (Oxford University Press 2000) and European Pensions & Global Finance (Oxford University
Press 2003), he is the co-editor of The Oxford Handbook of Pensions and Retirement Income (Oxford University Press 2006).
1

is a PhD candidate at Christ Church College, University of Oxford. His doctoral research focuses on the impact of competitive strategy and globalisation
on the design and implementation of corporate benefit systems. He holds graduate and undergraduate economics degrees from the Sorbonne (Paris I) and
Princeton University, respectively.
2

Received 14 December 2006; Revised 14 December 2006.

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Abstract
Once an integral component of company-sponsored compensation schemes in many Western economies,
private defined benefit (DB) pensions are in decline. For many, DB schemes (and their related healthcare
liabilities, depending on the jurisdiction) have hobbled the financial wellbeing of plan sponsors and even
whole sectors of industry. If a constraint on shareholder value in the short term, these schemes threaten longterm corporate survival in the emerging global economy. While there remains considerable debate over the
ability of financial markets to adequately price DB liabilities, there is a growing industry devoted to
estimating their long-term risks with respect to longevity, inflation and cost. In part I of this two-part paper,
we surveyed the nature and significance of the problem, focusing upon the UK and the US private employersponsored plans. We suggested that the 'crisis' was apparent, for those willing to look, a decade ago. Its
significance was papered over by the 1990s stock market bubble and high interest rates but has returned
through what many analysts identify as a 'perfect storm'. Having documented the nature and scope of the
'perfect storm', we now evaluate in part II the proffered solutions to the crisis, such as financial engineering,
government intervention and private sector negotiation. In the final sections of the paper, we set out the
principles that should guide the design of new kinds of employer-sponsored plans noting that if, as suggested
by many experts, Western economies are entering an era of increasing labour shortage, private pensions will
continue to have an important role in managing human capital.
Keywords:
Pension crisis, finance, solutions, future prospects
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Introduction
Once an integral component of company-sponsored compensation schemes in many Western economies, defined
benefit (DB) pensions have hobbled the financial wellbeing of plan sponsors and even whole sectors of industry. In
part I of this paper, we demonstrated that while asset management, actuarial and accounting shortcomings set the

stage for the 'perfect storm', the actual impetus for the present 'pension crisis' was more complicated (see Managing
The Burden and Market Failure). Indeed, given the tumultuous nature of capitalism, the inherited DB institution is
constraining firm renewal and renovation necessary for success in the modern global economy. DB plan sponsors
are tied to the past, forced to face the future with inefficient and outdated organisational structures and competitive
strategies (see Scope of the Problem).
We now turn in part II to the proffered solutions to the pension crisis. To begin with, we argue that the current
toolbox of solutions, such as negotiated agreements between the implicated parties (next section), government
regulation (section Framework for government intervention) and financial products structured to better match with
liabilities (section Framework for a market solution) are inadequate. Subsequently, we show that the dearth of viable
long-term solutions stems, in part, from an inability to reduce the high cost of DB pension obligations, since
contributions must be high enough to pay for what may be decades of inactivity (section Reality check: Pensions are
expensive). Finally, we argue that distributing the high cost of occupational pensions, in a manner that does not
impact in unintended ways the core operations of the plan sponsor, is necessary (section The principles for a
sustainable model). We conclude part II with a road map for plan sponsors intent on evolving towards less
constricting pension provisions. In all cases, the path forward for the DB pension crisis should be a private-sector
solution (perhaps facilitated by government interventions) that achieves a new pension structure in which workers,
employers and shareholders share the pension cost (although perhaps not the pension risk) cooperatively and fairly
for the benefit of all parties.
The section below builds on previous sectionsfrom 'Part I: The 'Crisis' in Defined Benefit Corporate Pension
Liabilities: Scope of the Problem', previously published in Pensions.
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Framework for a negotiated solution

Negotiations require sacrifice
In both the UK and the US, a resolution of the DB knot must be found for employers, employees, shareholders and
even taxpayers. A 'natural' solution to the DB pension crisis would be contract renegotiation. For negotiations to
succeed, however, each party needs to be willing to sacrifice, and the level of compromise required to restructure
looming pension burdens does not seem readily available in today's environment. Indeed, in order to achieve a costeffective negotiated solution to the crisis, private solutions require informational and bargaining-power symmetry as
well as overcoming misaligned interests due to principalagent problems, a tall order.1 The competing interests of
legislators, shareholders, M&A merchants, buy-out markets, private equity markets, insurance markets and workers
(retired and active) threaten the prospect of negotiations. Sponsors are also responsible as they all appear very keen
to push the liability forward to future generations of managers to deal with and, in the case of US sponsors, use
bankruptcy courts as a bailout or as a means of controlling negotiations.

Collective breakdown?
One group will require the most convincing: organised labour. The unions' historical role in pension provision
demonstrates that their agreement, in particular, is vital to a successfully negotiated outcome. The presence of
organised labour in post WWII manufacturing industries drove the original widespread implementation of DB
pensions.2 Although weakened, the unions have retained much of their bargaining power in those industries (if not
beyond).3 As noted in Part I unionised workers in the US are roughly four to five times as likely to receive DB

pension benefits as nonunionised workers.4 This should not be surprising, as unions tend to use their bargaining
power to push wages above market-clearing levels.5 It is not our intention to attack unions, as academic research has
also shown that unions may increase labour productivity.6, 7, 8 and 9 In any case, dismantling the traditional DB pension
schemes will require some sort of union partnership and cooperation.
In the UK, of course, The Pension Regulator has assumed the role of 'honest broker' and is heavily involved in
creating solutions for both plan sponsors and beneficiaries. This role includes being a 'crisis manager' for plan
sponsors threatened by default or insolvency. Most importantly, however, The Pension Regulator also acts as
'facilitator' of financial market transactions where pension liabilities are a major consideration (see the Marconi and
BAA deals). As such, The Regulator is viewed in the marketplace as an engaged third party rather than simply as a
constraint on deal making. Finally, The Regulator only guarantees a fraction of the accrued benefit as compared to
the Pension Benefit Guaranty Corporation (PBGC), which means all parties are more willing to make concessions.
In search of a new model
In order to make a fresh start and increase the likelihood of achieving successful negotiations, sponsors should be
focused on both 'cost-cutting' and 'risk-cutting' (ie risk transfer). Traditional DB pensions will not be available to
new employees for much longer without cost reductions. For new pension constructs to be sustainable and secure,
however, they will need to distribute the risks inherent to DB pension plans in ways that are neutral with respect to
corporate structure. One system often lauded in this context is in the Netherlands. We now turn to the Dutch
occupational model for inspiration.

Sustainable DB
Jan Nijsen, CEO of ING, recently stated, 'The Netherlands may be the country with the highest likelihood of
keeping a long-term sustainable defined benefit system.'10 The Netherlands offers a flexible and transparent
mandatory second pillar pension structure that has convinced some of its sustainability. According to the Dutch
central bank, pension regulation should be strict enough to safeguard solvency, but not so restrictive as to interfere
with optimal management policies. Additionally, it believes that overly severe funding rules would compound the
trend for pension fund sponsors to reduce guarantees or switch to DC plans.11

Rigid flexibility
The Dutch system combines inflexible solvency requirements for guaranteed nominal pension rights with high
levels of flexibility for conditional pension rights.

Rigidity
Dutch pension funds are required to maintain a funding coverage ratio of 105 per cent at all times. Any drop below
this level of funding requires a resolution in one year. In addition, pensions need to build up a cushion of up to 130
per cent, which varies according to the risk profile of the assets in the portfolio.12 These are strict requirements that
ensure firms will have enough capital to pay at least nominal benefits. This approach to securing the pension benefit
can be explained by the fact that the pension regulator PVK (now integrated into the Dutch National Bank) also
regulates the insurance industry.

Flexibility
Pension funds have recourse to three main tools with which they can affect their funding status: contribution policy,
indexation policy and investment strategy.13 When in unfunded states, funds can require increased contributions,
forestall the indexation of benefits and/or change the investment strategy. For conditional pension rights (indexed),
funds are not required to reserve extra capital. While indexed benefits are encouraged (and are often provided), only
nominal benefits are guaranteed. In addition, benefits are largely based on the average wage rather than on the final
salary, reducing funds' exposure to wage inflation risks.

A new hope?
The Dutch model could be enlightening for regulators in the UK and the US facing DB pension crisis. Indeed, the
flexibilities built into the Dutch DB pension deal give it a DC-like flavour; benefits paid are, in part, a function of
contributions and investment returns, thereby reducing the risks on the sponsoring organisations. However, this is
most likely to be the 'end-model' not to emulate. The dwindling organised labour movements of the UK and the US
suggest that this would be difficult to achieve as social solidarity underpins the whole Dutch pension
framework.14Moreover, the nominal guarantee of benefits can still cause problems between stakeholders over how
these guarantees should be valued and funded (see section, The principles for a sustainable model: neutrality).
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Framework for government intervention

Security above costs
Outsourcing supplementary pension provision to the private sector, a desired goal of the UK and the US
governments over the past 50 years (witness the significance of tax benefits on employee and employer
contributions), needs to be undertaken with due regard to the distribution of costs and risks.15 The governments'
current willingness to eliminate the possibility of default, however, has concentrated with plan sponsors both the
costs and the risks of a DB plan. Interestingly, given the long history of occupational pension provision, the first
serious foray into pension funding regulation was only in 1974 the US Employee Retirement Income Security
Act. Since that time, numerous regulations restricting pension provision have been passed across the OECD. Thus
far, legislation has focused on improving the security of plans and protecting the rights of plan beneficiaries. 15
Once again, we face a political turning point in which governments will be called upon to assist in constructing a
'new' private pension agreement. For example, the recent US Pension Protection Act overhauls pension funding rules
and also seeks to avoid a government bailout of the beleaguered PBGC.16 The UK Pension Act of 2004, among other
things, set up the Pension Protection Fund (PPF) and The Pension Regulator, with the prospect of risk-related
insurance premiums. Although the Dutch pension system is on firm ground, the FTK reform package requires fair
value analysis for pension liabilities and assets. In addition, global accounting standards are likely to adopt pension
valuation standards similar to the UK in order to increase transparency.
The need for DB pension reform must be reconciled with increases in market distortion and sponsor costs, including
those associated with tighter funding rules and requirements. For example, increasing regulatory costs could lead to
enormous impositions on already imperilled firms. Indeed, the countercyclical nature of funding rules already poses
a threat to DB sustainability, as companies must fund more in downturns, when they might not be able to afford it.

So far, the UK and the US seem willing to increase benefit 'security' in spite of its constricting financial effects on
sponsoring firms, tightening the 'knot of contracts' and reinforcing the prospect of a failure of the DB institution.
Why the nuclear option is not desirable
For firms facing this 'tightening' stalemate, the government bailout via bankruptcy in the US and via the PPF in the
UK may appear to be the only way to proceed. In fact, the US airline industry provides a good example of this
claim: in 2005, Delta, Northwest, United Airlines and US Airways all filed for Chapter 11 bankruptcy. American
Airlines is the only legacy carrier that has not yet resorted to court-ordered restructuring. This, however, puts
American Airlines at a disadvantage as its competitors are expected to exit Chapter 11 with healthier balance sheets
and lower current pension costs. In effect, the current crop of companies emerging from Chapter 11 are in much
better financial shape.

Not desirable
No firm should have a pension interest in declaring bankruptcy. But those with debilitating DB pension obligations
are seemingly left with no other option. This is a difficult and undesirable path. If total liabilities are greater than
assets (as is often the case for firms with large unfunded pension liabilities), bankruptcy usually results in
bondholders ending up with shares, shareholders ending up with hardly anything, workers ending up with much
lower benefits and wages and management's focus being drawn away from core business. The transaction costs are
extremely high, and the brinkmanship associated with a bankruptcy proceeding is antithetical to negotiated
agreements. There are numerous opportunities for hold-up or hold-out.17 Finally, the courts will not necessarily do an
effective job of restructuring. Indeed, the courts are hardly pension negotiators by training and expertise. 18
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Framework for a market solution

Wall Street solutions
In the absence of a negotiated or government solution, innovative financial products and investment strategies are
finding a home within the pension community. The eagerness of plan sponsors to change errant investment strategies
of the late 1990s, combined with the prospect of increased balance sheet volatility due to mark-to-market pension
accounting, has sparked widespread interest among DB pension funds in risk immunisation and liability
management.
The pension plans, however, looking for long-term solutions to their pension woes in financial products may be
disappointed. DB pension providers face many risks, some hedgeable and some not, all of which pose serious threats
to pension health.19 The 'unhedgeables' have thus far been resistant to the financial community's attempts to mitigate
them. There are examples of success, such as the December 2003 Swiss Re mortality catastrophe bond. 20, 21 But such
successes are rare and matched by failures.22 Nevertheless, financial innovation is worth examining, as it will very
likely be an intermediate stepping stone in the path to a long-term stable solution.

Successful innovation

Pension funds have been drivers of financial innovation for decades, as their asset management strategies have
prompted the provision of complex financial products. See, for example, Zvi Bodie23: 'While the immunisation
strategies of pension funds have spurred innovation in the fixed income securities markets, pension fund contingent
immunisation and portfolio insurance strategies have created a market for options and financial futures contracts.'
There is no doubt that the peculiar requirements placed on pension funds have been a driving force for financial
innovation since the 1970s.24
Financial innovation continues today. For instance, pension funds are increasingly demanding swap and derivative
strategies, as pension funds become more sophisticated consumers of investment advice. If implemented properly,
swaps can hedge against various risks,25, 26 such as interest rate changes.27, 28

Financial limitations
Financial products also offer trustees and management 'stop loss' strategies, risk immunisation, decreased balance
sheet volatility and more efficient use of pension capital. With the huge demand coming from pension funds, the
underlying problem impeding a structured finance solution is supply (see 50-year Gilts and 30-year Treasuries,
where yields are far lower than historical levels). The supply of these securities could increase as governments take
advantage of cheap debt. If, however, we consider widespread implementation of strategies involving longevity or
inflation-linked bonds, finding suitable supplies to serve the UK and the US DB pension universe seems highly
unlikely. Swap contracts may offer more liquidity, but they are expensive. In addition, unfunded plans that
implement these strategies are committed to making up most of their deficit with increased contributions a
displeasing prospect for shareholders.
In addition, despite high costs, these strategies do not eliminate all of the risks for the firm. Some of the
'unhedgeables' (mortality risk, inflation risk, etc) will remain in one form or another, leaving the sponsor vulnerable
in the future.29Consequently, sponsors allow for the possibility that they will be hampered in some new way in the
future (just as few saw, 30 years ago, the problems DB pensions would cause today).

Bulge business
Investment banks stand to gain significantly from the increased trading volume in structured financial products;
multi-billion-dollar swap deals are particularly lucrative. This trend has not gone unnoticed, as bulge bracket firms
beef up their pension supervisory services to offer tailor-made pension solutions, and specialty investment shops,
such as Integrated Finance Limited,30 are created to take advantage of this trend. The development of specialists is
welcome, as they will no doubt push financial innovation and raise awareness within the pension universe. In order
to be a part of the long-term solution to the DB crisis, however, specialists need to find innovative ways to sidestep
capacity constraints and eliminate the 'unhedgeables'. Otherwise, any single financial product or strategy, no matter
how successful it is on a client-to-client basis, is not a solution to the pension crisis.
One time charge
Financial instruments can only be partial solutions to the risks posed by DB pension obligations due to unhedgeable
risks and capacity limitations (again making pension liabilities different from traditional debt). Therefore, plan
sponsors, keen to avoid diverted cash flows and balance sheet volatility, are looking towards the bulk annuity market
and insurance companies as a possible solution to their pension problems. 31 The bulk annuity market is a unique type
of outsourcing; companies pay insurers a premium for taking on their pension assets and liabilities and removing the

latent DB pension risks from the plan sponsor. At present, however, this costly solution is only available to plans that
have reached full funding.

Risk takers
In order for bulk annuities to have widespread appeal, supportive regulation, which eases the capital requirements of
firms underwriting the business and clarifies the legality of the transactions, is required. This should create more
liquid markets, as current conditions are unsatisfactory and anticompetitive. For example, the UK Office of Fair
Trading investigated the bulk annuity market in 2005 after complaints of unfair pricing.32 At the time of writing, the
UK market for bulk annuities remains restricted, with Prudential and Legal & General writing almost all of the
business. Logically, higher levels of competition among bulk annuity providers would lower costs to a more
reasonable level. Encouragingly, this appears to be happening, as firms and high profile individuals are considering
entering the market, including Aviva, Aegon, Mark Wood, Warren Buffett, Isabel Hudson, Hugh Osmond, Edmund
Truell and numerous investment banks. Indeed, one managing director at a bulge bracket investment bank told us
that he has the green light to acquire a pension fund; their only problem is pricing the deal. In addition, Retiree
Benefits LLC is the first US firm to express interest in the US buy-out market, suggesting this market is primed for
growth as well. These players hope to make profits by doing a better job than pension funds at managing the
intersection between assets and liabilities.
Although expensive, they are a one-time charge that could eliminate the sponsor's risks. As such, via bulk buy-outs,
traditional DB pension liabilities could be 'sold off' and new, more sustainable plans constructed. These transactions
would facilitate institutional solutions we believe important (see conclusions). Ideally, this service would be offered
to funded and unfunded plans (via pay down periods over a set number of years).

A stepping stone
Financial markets have a crucial role to play in resolving the pension crisis. This role, however, is not, as was hoped
by some, the panacea to the pension crisis. Both investment banks and bulk players are seeking to carve out the DB
pension risks and take them from the sponsor. This is a key stepping-stone and requires ongoing innovation (and
regulatory support), as the transfer of risks will create an opening for change. The ultimate solution to the pension
crisis is, however, what fills this opening, not what creates it.
Lifelong charge
Considering that no complete integrated solution exists, many DB sponsors feel obliged to ride out their pension
troubles. One response is for sponsors to close their plan to new entrants and work the liability off over the long
term. Closing underfunded plans, however, is not without risks, as the maturity of such plans accelerates without a
stream of younger participants. In addition, mature plans typically have greater calls on corporate assets and
revenues, due to the funding costs associated with participants as they approach retirement. Accelerating maturity
also normally prompts a switch from riskier assets to lower-yielding safe assets. This switch often requires firms to
contribute more in order to return plans to funded levels, putting more stress on plan sponsors and on the market for
fixed income products.33 As such, freezing pensions with the goal of wearing down the liability over the long term is
not an effective solution to the pension crisis; the burden of a mature closed DB pension could outweigh that of an
open DB pension (depending on the circumstances of the plan sponsor).34, 35 Consequently, the decision to close or
freeze a plan must be taken in coordination with a well thought out immunisation and funding strategy (see
conclusions).

Corporate control
Despite the media attention on pension deficits among FTSE 100 and S&P 500 DB plan sponsors, hundreds and
perhaps thousands of small- and medium-sized corporations are also being forced to cope with burdensome DB
pension liabilities. These firms are in a difficult position, but there is a solution for these smaller plan sponsors that
is unavailable to larger firms: traditional mergers and acquisitions.
As indicated in part I, sponsors of maturing DB plans sequentially make themselves less competitive each time they
choose current DB contributions over current investment in the firm. Moreover, as funding rules are tightening and
prospective pension deficits are significant, the current generation of managers is being forced to privilege
contributions over investment. As such, for firms with DB pension deficits, corporate competitiveness, particularly
on the international stage, could spiral downwards. Although this is an alarming prospect for managers of small
firms, selling out may offer firms another 'solution' outside of bankruptcy courts.
Indeed, large corporations would have no problem acquiring small DB plan sponsors so long as the acquirer has a
benefit plan and capital structure different from the target. If this is the case, the DB pension obligation could be
easily managed as a very small piece of the capital structure of the new larger firm. 36 Moreover, using immunisation
strategies, the target could minimise its DB pension risks, making itself a relatively attractive target and facilitating
more generous pricing of the deal. Such a deal would be welcomed by shareholders and employees, although
managers would effectively be selling their jobs. Although this is an extreme 'solution', some firms will have no
other private sector alternatives.
Perfect storm III
Just as interest rates and assets came together in 2001 and 2002 in a perfect storm that sent pension funding levels
plummeting, some hope that a partnership of high interest rates and high asset returns could send plans back to fully
funded levels, avoiding the costly prospect of achieving full funding with contributions alone. Currently, with shortterm interest rates rising, and markets showing resilience, deficit levels have been gradually improving from the
lows seen between 2003 and 2005. Before ushering in the inverse perfect storm however, one needs to remember
how unlikely this outcome is, as asset markets typically react inversely to interest rates; when rates get too high,
bond and equity markets suffer. Nevertheless, considering the perfect storm I, it is not outside the realm of
possibilities and should at least be considered by sponsors in scenario planning particularly considering that
sponsors who are keen to immunise their risk may be holding assets that, although better reflecting their liabilities,
do not carry the risk premium necessary to ride a wave of asset growth out of DB pension underfunding.
Topof page

Reality check: Pensions are expensive

Affordability
Coming to grips with the true cost of retirement is vital to constructing a sustainable pension deal. (See Box 1 in
Appendix for PGGM's Innovative Fair Value model.) Simply stated, pensions and retirement are extremely
expensive. Moreover, while negotiations offer a mechanism for sharing the risk burden, and financial products offer
a way of hedging against some priceable risks, neither are effective at reducing current costs. Indeed, within a
traditional DB pension, the benefit remains inflexible and generous, a toxic mix.

Box 1 - PGGM's fair value model.

Full table

Atlas the titan

As of the mid-1990s (the most recent data available from the US Bureau of Labor Statistics), in medium and large
private establishments, only 3 per cent of employees with DB pensions were required to contribute to their DB
pensions.37 Although this percentage has no doubt risen, given the extent of current underfunding, it nonetheless
suggests that firms have had to shoulder a large portion of the increase in pension costs over the past decade. 38 In the
UK, DB contributions have increased from 15.8 per cent in 2002 to 22 per cent of earnings in 2005 (Association of
Consulting Actuaries Pension Trends Survey 2005).39 Yet, the percentage paid by the employer has risen more than
the portion paid through employee contributions (employers' portion is up by 5 per cent but employees' by just 1.2
per cent since 2002). This demonstrates the over-weighting of cost with the sponsor and the inability to
meaningfully change contribution policies to meet the high cost of pensions.
Undeniably, the dearth of viable long-term solutions to the pension crisis stems in part from the inability to reduce
the high cost of retirement. With the market returns on the asset pools no longer able to keep up with the generosity
of benefits, contribution levels must be set high enough to avoid an unstable plan. As a first step, if DB pensions
shared this cost more equitably between workers and plan sponsors in ways that were 'neutral' with respect to firm
effects, then the system could conceivably function efficiently.
Contributions before benefits
While current negotiations between employers and employees focus heavily on benefit levels, perhaps a near-term
'solution' could be a new bargain over the correct contribution rate. Indeed, benefit levels are rendered irrelevant if
insufficient cash is set aside for pension funding. Raising employee contributions is one possible step forward in
sharing costs. For example, a benefit formula that increased employee contributions when wages go up (as would
happen if employees are required to give a percentage of their salary) is an effective partial hedge for the sponsor
against wage inflation. Moreover, as we note later on, linking a contribution increase when a pay raise is given is
less painful for employees, rather than trying to increase contributions outright.40 In addition, 'cost sharing' contracts
that last for five to ten years, in which contribution levels for plan sponsors are fixed, would decrease volatility and
increase DB pension sustainability.

Useful intervention
Changing employee contributions is not straightforward. Even if the pension covenant would allow it, a change in
contribution levels could breach the employment contract.41 Such considerations are serious, and they may restrict a

firm's ability to act. In case of negotiation-paralysis, collective welfare may be served if the government were to set
contribution guidelines (rather than funding rules) for both employees and employers in a manner that shares costs. 42

Outlook
DB pensions are inherently expensive and, as the first few years of this decade demonstrate, previous attempts to
find shortcuts have ended in hardship. Understanding the true cost of pensions is important, and sharing the burden
of that cost will be essential for future endeavours.43 Of course, simply implementing a hike in employee
contribution rates does not remove the burden of the DB pension obligation (and the associated risks) from the firm.
Nevertheless, understanding how contribution rates impact pension benefits will be necessary for the construction of
an institutional solution.
Topof page

The principles for a sustainable model

A difficult path
Highlighting the principles of sustainability is important, because solutions to the pension crisis are so difficult to
find and justify to stakeholders. Below, we have listed five particularly important principles that will need to be
incorporated in any viable solution.

Pareto improvement
The success of any institutional solution or reform relies on maintaining the firms' market competitiveness while
minimising harm to employees. In evaluating the welfare of the employee, however, one must examine everything:
quality of life, longevity, job security, early retirement, compensation, etc. In this context, if life is longer, and all
other variables remain the same, the employee is better off; in contrast, the firm is worse off, as it has to support the
employee's extended life without receiving anything in return. In order to achieve a Pareto improvement, the gain in
longevity for the employee would have to leave the firm no worse off. As such, increased longevity should be paired
with a longer working life or more flexible contributions and benefits. There are trade-offs to be made in this crisis
in order to right the wrongs of the past decades and to achieve a feasible solution to the current dilemma.

Untying the knot

All DB sponsors will need to look for ways to 'untie the knot' and unravel the contracts. For those firms with high
levels of unionisation, binding arbitration could be a way of avoiding bankruptcy. In addition, for those firms that
can afford it, financial markets offer some effective options, such as bulk buy-outs. Many companies, however, hope
that the way forward is a generational one, in which new employees are not offered DB pensions, and the inherited
liability of DB schemes is worked off by those employees over the long term. Yet, letting the liability wind down is
a slow process, and may take several decades. For firms facing stiff market competition and demands from
shareholders, this may be too long.

Good government

Despite past misjudgments, governments still have a significant role to play in resolving the pension crisis. Without
new regulations governing contributions and encouraging the formation of a market for bulk buy-outs, private sector
solutions may be stymied; the remaining option is a bailout. Regulation should, however, encourage the provision of
plans that are 'neutral' with respect to corporate structure and, more importantly, facilitate the transition of traditional
DB pensions to something else. In addition, corporate compensation practices have changed as fast as corporate
structure, suggesting that room needs to be left for compensation and benefit flexibility. Finally, and perhaps most
importantly, because pension provision in the private sector is voluntary, regulations must not confuse the objectives
of the firm, which would only result in nonprovision.44

Neutrality
Once traditional private sector DB pensions are gone, firms will need to take their pension design back to their
compensation practices. Specifically, firms are increasingly calling for plans that share risk; but for 'risk sharing' to
move pensions towards sustainability, it must only be a stepping-stone in the path towards 'neutrality'. Neutrality
means that the pension plan does not impact the core operations of the business in unintended ways, which suggests
that the risks, although not the costs, of the pension might have to fall on the employee (see Conclusions for more
details). Collective risk sharing is highly complex.45, 46 In traditional DB pensions, the only situation where conflict
between stakeholders can be avoided, from a game theory perspective, is when funding is exactly 100 per cent, since
outside of this equilibrium each party will attempt to 'win' the surplus or 'win' the right not to own the deficit. 47 Thus,
if employer-sponsored pensions are to remain, 'risk sharing' will not be a solution on its own, as each stakeholder
will inevitably look to 'win'. Consequently, neutrality implies 'risk cutting', although not necessarily 'cost cutting', for
the firm.48 In any case, the current convoluted risk structure needs to be untangled.

Innovation
Widespread institutional change is going to come from innovation, as new pension plan designs will ideally offer
firms more sustainable options. For example, hybrid pension schemes are one mechanism of encouraging
institutional innovation. Many firms see hybrids as a way to revitalise their DB plan structure. Indeed, hybrids are a
better option than continuing with a 'renegotiated' traditional DB plan, although this depends on the institutional setup in the country. Hybrids, such as cash balance plans, are regulated as if they are DB, but the assets and liabilities
grow as if they are DC, with contributions and a promised return (usually some T-bill rate). The benefit is then paid
as a lump sum, rather than as an annuity.49 In terms of advantages, hybrids offer a more even accrual rate than
traditional plans. Also, they do not penalise job mobility. Hybrids also allow sponsors to communicate pension
values to employees in a way that is very similar to DC, with account values and nominal accruals each year.
Another benefit of hybrids is the abolishment of early retirement provisions that are typically part of the overly
generous DB pension deal.50 Interestingly, even the American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO) and the Service Employees International Union have been investigating hybrid models in
an effort to combat waning pension coverage. Hybrids are no doubt an innovative alternative to traditional DB
pensions and a feasible institutional solution.
Topof page

Conclusions
A past generation of managers has made commitments requiring urgent renegotiation in the
present in order to avoid institutional failure in the future. This pension crisis is worsened by

the fact that government regulations have provided misguided incentives and compounded
the problem, neutering the possibility of achieving a private sector solution and making
government bailouts a first-order choice. Bearing in mind that there is no 'silver bullet' or
cost- or risk-free solution to the pension crisis, a road map is still necessary so those firms
faced with the burden of a DB pension can understand what is at stake and what choices
are available. Plan sponsors will first need to evaluate their own situation in order to
determine their final destination, as plan health will ultimately dictate what is available and
possible. Nevertheless, we believe four broad reform/restructuring paths can be
implemented:
Plan A: Removal and replacement
Plan A is the most complicated of the four options offered here as the DB plan has to be
removed before it can be replaced. Moreover, in order to remove the pension, plan A relies
on using solutions that have failed thus far the hope would be that negotiations,
government intervention and financial and insurance products can be successfully combined
and implemented in innovative ways. Nevertheless, each firm must consider its own
situation, as the path taken by a well-funded plan will differ from that of an underfunded
plan. The road map below is intended for the underfunded pension plan, which suggests
that some steps could be passed over by a healthy DB pension. Although we are aware of
the heroic nature of this undertaking, we argue that this is not impossible and is still the
best path forward out of the pension crisis. Each of these phases on their own is not an
adequate solution, but together they offer a road map to the future:
1. Contribute: Plan sponsors should start by re-negotiating contribution levels and/or
benefit levels (government involvement will most likely be required in this first phase
due to the many complications in renegotiating). DB pensions are simply too
expensive and generous for the firm to shoulder the entire burden. Changing benefit
levels or sharing the burden of contributions will help put precarious plans on a
firmer footing. (This should not be seen as a solution in its own right: just as
managers 30 years ago could not foresee the burden of the DB plan, it is also risky
to leave 'renegotiated' traditional DB plans in place.)
2. Immunise: Financial immunisation, although incomplete, will be a useful tool for
firms looking to transition out of their traditional DB pension. The plan can be
partially neutralised (possibly even to longevity risk if financial markets can
innovate). Moreover, married with equitable contribution and benefit policies, the
plan sponsor will not have to shoulder the burden of returning the plan to full funding
alone. Also, this 'stop loss' strategy will keep plans from relapsing into underfunded
status during transition towards closure.
3. Close: The paradox of closing or freezing a DB pension is that it accelerates the
maturity of the plan, which could then precipitate a crisis. Consequently, closure of
the DB pension needs to be to be undertaken after having completed the first two
steps above.
4. Sell: Once the traditional DB pension is frozen or closed, it will open the door for
removing the management of the plan from the sponsor. Currently, the bulk buy-out
market is the best hope for removal of the plan's risks. Thanks to the contribution

policy changes and the financial immunisation, the plan should be in good health.
More importantly, this health should allow for a cheaper bulk buy-out as competition
in the market for closed DB pensions will ideally be fierce (if government legislation
that reinforces this is implemented).
5. Replace: Once the DB pension is gone, the replacement is likely a DC type
plan.51 Indeed, it was conceded at our recent conference on DB pension liabilities that
DC has the most traction going forward in the private sector. As mentioned earlier,
however, traditional DC pensions can cause as many problems for the employee as
DB pensions cause for the employer. As such, new DC models are needed, and are
being created. Lessons from behavioural economics have helped to increase the
effectiveness of DC pensions at preparing workers for their retirement. This can
involve auto-enrolment, which has been proven to increase participation from 49 per
cent to 89 per cent.52,53 In addition, linking increased contributions with pay raises has
proven to be an effective mechanism for increasing the rate of contributions.40 In
addition to behavioural tricks, pooling of assets to reduce transaction costs and
consolidation of management could both improve DC efficiency. The DC plan could
also be married with a post-retirement mortality pooling plan that might provide
some annuity such as benefits at low costs.54, 55Finally, some are pushing for DC
pension models that use an 'auto-pilot' mechanism that, among other things, might
adjust contributions and investment policies over time, or include a phased purchase
of deferred annuities, in order to control for human errors commonly associated with
DC plans.56, 57 Whatever the shape it takes, DC, love it or hate it, is the future of
pension provision for those firms that face fierce market competition.
Plan B: Incremental change
If the above solution is not feasible, then the DB pension should be changed incrementally
over time. Hybrid pensions, which legally remain DB, can achieve neutrality with respect to
corporate structure and represent a significant improvement vis--vis traditional DB
pensions from the firm's perspective (see section, Reality check: Pensions are expensive).
Today, roughly 25 per cent of the Fortune 1000 DB sponsors have a hybrid.50 The success of
hybrids also demonstrates why the pension debate need not be polarised between final
salary DB and noncontributory DC there are feasible alternatives that occupy middle
ground.
Plan C: Multi-employer plans
Multi-employer pensions offer sponsors unable to implement plans A and B an alternative to
doing nothing. For example, in the DC environment, these plans have been quite successful
at pooling together smaller plans into regional, industry or even national plans (see in
particular Australia's superannuation scheme and the NAPF's Super Trusts proposal). These
multi-employer DC schemes reduce costs due to efficiencies and scale, all the while
maintaining a role for the employer in pension provision, an element we feel strongly about.
Ideally, this concept could be applied to smaller DB plan sponsors. By gathering DB plans
that individually struggle, a redistribution of risks and costs could achieve, although not
perfectly, a sustainable pension. Although government intervention may be necessary in this
instance, particularly to renegotiate contribution and benefit levels, this sort of a plan could
use the Dutch system as the model for reform.

Plan D: Nonemployer plans

As the UK Turner Report proposed, and the UK White Paper on Pensions (May 2006) has
recently endorsed, a nonemployer national programme could be an effective mechanism for
preparing people for retirement, so long as it incorporates some of the above innovative DC
characteristics. These nonemployer options are also gaining traction globally. In addition,
Ambachtsheer56, 57 has argued that his 'auto pilot' plan would also work as a nonemployer
DC-type pension one that addresses human and governance problems typical of
employer-sponsored traditional DC schemes. While we agree with the premise of these
plans (improving coverage rates and decreasing firm-based risks), we do not see this as a
viable solution due to the simple fact that occupational pensions still serve a labour
management purpose. Nevertheless, it is worth drawing people's attention to the possibility.

Final thoughts
The above solutions target neutrality with respect to corporate structure and are not in any
way a demonstration of our ambivalence towards employee welfare. By contrast, in
countries where labour is to become a scarce resource due to demographic challenges, in
particular Western Europe, the UK and to some extent North America, pensions will be a
vital component of labour attraction, management and retention. Thus, as these shortages
approach, they reinforce the need for an effective and sustainable pension system for the
benefit of all parties.

http://www.palgrave-journals.com/pm/journal/v12/n2/full/5950045a.html

2013
Tailoring Social Protection to Small Island Developing States: Lessons Learned from the
Caribbean(1.3mb pdf)
Social Protection Discussion Paper No. 1306; Publication Date: 08/13
by Asha Williams, Timothy Cheston, Aline Coudouel and Ludovic Subran
This paper examines the role of social protection (SP) in Small Island Developing States (SIDS), given
their particular structural, human resource and capacity constraints. The paper recommends a series of
systemic efforts to: (i) harmonize SP systems and policies across the region to better respond to
increased regional mobility; (ii) consolidate SP programs within countries to improve efficiency; (iii) foster
key human capital improvements among the poor to break inter-generational transmission of poverty; (iv)
improve monitoring and evaluation systems and data collection capacity to facilitate more responsive SP
programs; and (v) increase partnerships with civil society and private sector. At the thematic level, the
paper recommends (i) improving the responsiveness to economic and environmental shocks; (ii)
improving efficiency and effectiveness of social safety net programs, in particular cash transfer programs;
(iii) tailoring labor market interventions to respond to constraints faced in the SIDS context; and (iv)
reforming social insurance schemes, particularly pension schemes, to address current deficiencies and
ensure readiness to respond to impending ageing.
2012
Pension Coverage in Latin America: Trends and Determinants
Social Protection Discussion Paper No. 1217; Publication Date: 2012/08

by Rafael Rofman and Maria Laura Oliveri

This document presents an analysis of pension coverage trends in Latin America for the past decades.
Its preparation involved the collection, revision, and processing of household surveys in over 18 countries
in the region, spanning a period of almost 40 years in some cases. The main goal of this document is to
offer comparable data on pension coverage among the economically active population and the elderly,
considering the relevance of several demographic, social, and economic variables on these coverage
levels.
Private Pension Systems: Cross-Country Investment Performance
Social Protection Discussion Paper No. 1214; Publication Date: 2012/05
by Alberto R. Musalem and Ricardo Pasquini
This study investigates the performance of private pensions systems across countries a topic which
has yet to be adequately addressed in the literature. Specifically, this study examines the relationship
between pension fund performance (as captured by gross real rates of return and the three year
standard deviation of those returns) and the structure of a countrys private pension industry and the
design of its pension schemes. A database covering 27 countries over the period 1990-2007 was created
for this research.
Global Pension Systems and Their Reform: Worldwide Drivers, Trends, and Challenges
Social Protection Discussion Paper No. 1213; Publication Date: 2012/05
by Robert Holzmann
Across the world, pension systems and their reforms are in a constant state of flux driven by shifting
objectives, moving reform needs, and a changing enabling environment. The ongoing worldwide financial
crisis and the adjustment to an uncertain new normal will make future pension systems different from
past ones. The objectives of this policy review paper are threefold: (i) to briefly review recent and ongoing
key changes that are triggering reforms; (ii) to outline the main reform trends across pension pillars; and
(iii) to identify a few areas on which the pension reform community will need to focus to make a
difference.
International Patterns of Pension Provision II: A Worldwide Overview of Facts and Figures
Social Protection Discussion Paper No. 1211; Publication Date: 2012/06
by Montserrat Pallares-Miralles, Carolina Romero and Edward Whitehouse
This paper presents and explains cross country data for mandatory publicly and privately managed
pension systems around the world. Relevant World Bank demographic projections and other indicators
previously reported in International Patterns of Pension Provision (2000) are updated, and relationships
between key indicators are highlighted.
World Bank Support for Pensions and Social Security
Social Protection Discussion Paper No. 1208; Publication Date: 2012/03
by Mark Dorfman and Robert Palacios
Pension and social insurance programs that prevent a substantial loss in consumption resulting from old
age, disability, or death are an integral part of any social protection system. The dual objectives of such
programs are to allow for the prevention of a sharp decline in income when these life-cycle events take
place and protection against poverty in old age. This background paper reviews the World Banks
conceptual framework for the analysis of pension programs and defines the major challenges facing low
and middle income countries, namely, coverage, adequacy and sustainability. The paper proposes a
broad, forward-looking strategy to help address these challenges.
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2011
International Portability of Health-Cost Coverage: Concepts and Experience
Social Protection Discussion Paper No. 1115; Publication Date: 2011/07
by Martin Werding and Stuart McLennan
In this paper, full portability of health-cost coverage is taken to mean that mobile individuals can, at a
minimum, find comparable continuation of coverage under a different system and that this does not
impose external costs or benefits on other members of the systems in the source and destination
countries. Both of these aspects needs to be addressed in a meaningful portability framework for health
systems, as lacking or incomplete portability may not only lead to significant losses in coverage for an
individual who considers becoming mobile which may impede mobility that is otherwise likely to be
beneficial. It may also lead to financial losses, or windfall gains, for sources of health-cost funding which
can ultimately lead to a detrimental process of risk segmentation across national health systems.
Portability of Pension, Health, and other Social Benefits: Facts, Concepts, Issues
Social Protection Discussion Paper No. 1110; Publication Date: 2011/05
by Robert Holzmann and Johannes Koettl
Portability of social benefits across professions and countries is an increasing concern for individuals and
policy makers. Lacking or incomplete transfers of acquired social rights are feared to negatively impact
individual labor market decisions as well as capacity to address social risks with consequences for
economic and social outcomes. The paper gives a fresh and provocative look on the international
perspective of the topic that has so far been dominated by social policy lawyers working within the
framework of bilateral agreements; the input by economists has been very limited. It offers an analytical
framework for portability analysis that suggests separating the risk pooling, (implicit or actual) pre-funding
and redistributive elements in the benefit design and explores the proposed alternative approach for
pensions and health care benefits. This promising approach may serve both as a substitute and
complement to bi- and multilateral agreements.
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2009
Ex-Ante Methods to Assess the Impact of Social Insurance Policies on Labor Supply with an
Application to Brazil
Social Protection Discussion Paper No. 0929; Publication Date: 2009/12
by David A. Robalino, Eduardo Zylberstajn, Helio Zylberstajn and Luis Eduardo Afonso
This paper solves and estimates a stochastic model of optimal inter-temporal behavior to assess how
changes in the design of the unemployment benefits and pension systems in Brazil could affect savings
rates, the share of time that individuals spend outside of the formal sector, and retirement decisions.
Dynamics depend on five main parameters: preferences regarding consumption and leisure, preferences
regarding formal versus informal work, attitudes towards risks, the rate of time preference, and the
distribution of an exogenous shock that affects movements in and out of the social insurance system
(given individual decisions). The yearly household survey is used to create a pseudo panel by agecohorts and estimate the joint distribution of model parameters based on a generalized version of the
Gibbs sampler.
Rethinking Survivor Benefits
Social Protection Discussion Paper No. 0928; Publication Date: 2009/12
by Estelle James
This paper provides a framework for analyzing the efficiency and equity of survivor benefit programs.
These programs were originally designed to support families when the main wage-earner died, in an era
where women rarely worked, fertility rates were high, and widows were unable to support themselves

and their children. Yet, voluntary saving and insurance were often insufficient due to myopia. Mandatory
survivor benefits helped to achieve lifetime consumption smoothing for the family and to prevent poverty
among elderly widowsthe group where old age poverty is concentrated. The question isare these
programs still needed in an era when most women work and fertility rates have fallen and, if so, how
should they be designed?
How Much Do Latin American Pension Programs Promise to Pay Back?
Social Protection Discussion Paper No. 0927; Publication Date: 2009/12
by Alvaro Forteza and Guzmn Ourens
The authors present a new database of social security indicators for eleven Latin American countries
designed to assess pension schemes in terms of the payments they promise in return to contributions.
Based on this data, the authors analyze inequality, insurance and incentives to work, using the
replacement rates and the internal rates of return implicit in the flows of contributions and pensions.
Work Histories and Pension Entitlements in Argentina, Chile and Uruguay
Social Protection Discussion Paper No. 0926; Publication Date: 2009/12
by Alvaro Forteza, Ignacio Apella, Eduardo Fajnzylber, Carlos Grushka, Ianina Rossi and Graciela
Sanroman
The authors propose alternative methods to project pension rights and implement them in Chile and
Uruguay and partially in Argentina. The authors use incomplete work histories databases from the social
security administrations to project entire lifetime work histories. The authors first fit linear probability and
duration models of the contribution status and dynamic linear models of the income level. The authors
then run Monte Carlo simulations to project work histories and compute pension rights. According to our
results, significant swathes of the population would not access to fundamental pension benefits at age
65, if the current eligibility rules were strictly enforced.
Indexing Pensions
Social Protection Discussion Paper No. 0925; Publication Date: 2009/12
by John Piggott and Renuka Sane
Pension indexation should anchor the parameters of the pension system to one or more economic and
demographic variables to ensure that the system is implemented in a sustainable way, while minimizing
distortions affecting important economic choices. Arguing that financial sustainability, incentive
compatibility and consistency across multiple government programs are critical, the authors examine the
many linkages between the various parameters of pension schemes. Finally, the authors turn to the cost
of the insurance dimension of indexation, and suggest that option pricing techniques could be used to
price indexation guarantees, and that this approach may suggest refinements to indexation practice not
thus far implemented.
Pension Systems for the Informal Sector in Asia
Social Protection Discussion Paper No. 0903; Publication Date: 2009/03
edited by Landis MacKellar
This paper looks at the experiences of various Asian countries in expanding the coverage of the pension
system to informal sector workers. The paper argues that given aging and growing informality, a rapid
forward-looking response from governments in the region is necessary to provide protection against the
risk of poverty in old age. This risk is particularly acute in the case of informal sector workers, as is the
difficulty of reaching them through traditional formal-sector pension approaches. From the analysis of
various case studies the paper concludes that expanding coverage to informal sector workers through
mandatory systems is unlikely to work. Alternative, voluntary arrangements are need. However, because
informal sector workers tend to have lower savings capacity and high discount rates, targeted subsidies
might be required to encourage enrollment. The paper discusses some of the issues related to the
design of these programs -- including those related to administration and the collection of contributions.
In all cases, the paper emphasizes the need to resolve difficult tradeoffs between these transfers to

prevent poverty during old-age and expenditures in other social programs.

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2008
Investing for the Old Age: Pensions, Children and Savings
Social Protection Discussion Paper No. 0838; Publication Date: 2008/12
by Vincenzo Galasso, Roberta Gatti and Paola Profeta
In the last century most countries have experienced both an increase in pension spending and a decline
in fertility. The authors argue that the interplay of pension generosity and development of capital markets
is crucial to understand fertility decisions. Since children have traditionally represented for parents a form
of retirement saving, particularly in economies with limited or non-existent capital markets, an exogenous
increase of pension spending provides a saving technology alternative to children, thus relaxing financial
(saving) constraints and reducing fertility. The authors build a simple two-period OLG model to show that
an increase in pensions is associated with a larger decrease in fertility in countries in which individuals
have less access to financial markets. Cross-country regression analysis supports the authors' result: an
interaction between various measures of pension generosity and a proxy for the development of financial
markets consistently enters the regressions positively and significantly, suggesting that in economies with
limited financial markets, children represent a (if not the only) way for parents to save for old age, and
that increases in pensions amount effectively to relaxing these constraints.
The Performance of Social Pensions in India: The Case of Rajasthan (310kb pdf)
Social Protection Discussion Paper No. 0834; Publication Date: 2008/07
by Puja Vasudeva Dutta
The Government of India has recently announced a dramatic expansion of social pension schemes both
in terms of coverage and benefit levels. Yet relatively little is known about how these programs are
administered or how well they achieve their objectives. This paper assesses the performance of a social
pension scheme in the Indian state of Rajasthan. In particular, the authors review the experience with
respect to program awareness, coverage, targeting and leakage as well as delivery mechanisms. The
overall assessment is positive and holds broader lessons for social assistance in India. Thus, transaction
costs once pensions are sanctioned are low, disbursements are largely as per schedule, leakage in the
form of shortfalls in benefits is generally low and satisfaction levels with the social pension scheme are
high. At the same time there are clear areas for improvement on both the policy and administration side.
There is evidence of under-coverage and high transaction costs associated with the application process.
Though targeting is generally progressive, especially for old age and widow pensions though less so for
disability pensions, targeting is far from perfect and the eligibility criteria are not strictly enforced. There is
a strong case for relaxing, rationalizing and clarifying some of the existing criteria. On the administration
front, several basic issues relating to implementation need to be addressed, particularly with respect to
transaction costs in the sanction of pensions, wide inter-district variations in performance within the state
and inadequate record-keeping and monitoring.
Reforming the Pension Reforms: The Recent Initiatives and Actions on Pensions in Argentina and
Chile
Social Protection Discussion Paper No. 0831; Publication Date: 2008/05
by Rafael Rofman, Eduardo Fajnzylber and German Herrera
This paper describes the recent reforms of pension policies adopted by Argentina and Chile. The
structural reforms in the 1980s and 90s were targeted on improving the long term fiscal sustainability of
the system and their institutional design, while transferring part of the economic and social risks from the
State to participants. However, in recent years authorities in both countries coincided on identifying
insufficient coverage among the elderly and adequacy of benefits as the most critical problems. As a
result of differences in political economy and institutional constraints, responses were different. In Chile,
a long and participatory process resulted in a large reform that focuses on impacts on the medium term,
through a carefully calibrated adjustment. In Argentina, instead, reforms were adopted through a large

number of successive normative corrections, with little public debate about their implications, and
immediate impacts on coverage and fiscal demands.
Work History and the Access to Contributory Pensions in Uruguay: Some Facts and Policy
Options(273kb pdf)
Social Protection Discussion Paper No. 0829; Publication Date: 2008/05
by Marisa Bucheli, Alvaro Forteza and Ianina Rossi
Incomplete and highly fragmented work histories threaten to leave many contributors of the pension
schemes in Latin America without the minimum pension guarantee or even without access to the ordinary
pension. The authors propose a methodology to assess this risk, identify vulnerable groups and study
potential determinants of the history of contributions using information from the work history records of
the social security institutions. The authors apply this methodology to the largest social security institution
of Uruguay, the Banco de Previsin Social, and show that the majority of contributors to this institution
might not comply with the minimum number of years of contribution that is currently required to access
an ordinary pension when they reach the retirement age.
A Theory of Contribution Density and Implications for Pension Design (300kb pdf)
Social Protection Discussion Paper No. 0828; Publication Date: 2008/07
by Salvador Valds-Prieto
The adequacy of contributory pensions for the middle classes depends on density of contribution.
Density can be far below 100% because the State is unable or unwilling to impose the mandate to
contribute on all jobs, especially on poor workers such as many in self-employment and small firms. The
paper presents a model where individuals choose whether to bundle saving for old age in a covered job
or to save independently while choosing an uncovered job. The determinants of the effective rate of
return offered by the contributory pension plan include the earnings differential. This return is then
compared with the returns offered by pure saving in the financial market, to determine the equilibrium
density of contribution. The paper also applies the model to assess two standard designs for
noncontributory subsidies for the old poor. It finds that these standard designs crowd out contributory
pensions for the middle classes by reducing density. The paper also considers two second-generation
designs for noncontributory subsidies and other approaches to raise density. This model also allows
optimization of the combined multipillar structure, where participants get noncontributory pensions and
also contributory pensions based on both mandates and fiscal incentives.
On the Financial Sustainability of Earnings-Related Pension Schemes With Pay-As-You-Go
Financing (697kb pdf)
Social Protection Discussion Paper No. 0827; Publication Date: 2008/07
by David A. Robalino and Andrs Bodor
In this paper the authors review the characterization of the sustainable rate of return of an earningsrelated pension system with pay-as-you-go financing. The authors show that current proxies for the
sustainable rate, including the Swedish gyroscope, are not stable and propose an alternative measure
that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector
macroeconomic model that embeds a notional account pension system the authors test how the different
proxies perform in the presence of various macroeconomic and demographic shocks. The authors find
that the new formula proposed in this paper is the most stable. It avoids the accumulation of assets
without bound (which penalizes workers) while always ensuring a positive buffer fund.
An Ex-Ante Evaluation of the Impact of Social Insurance Policies on Labor Supply in Brazil: The Case
for Explicit over Implicit Redistribution
Social Protection Discussion Paper No. 0826; Publication Date: 2008/07
by David A. Robalino, Eduardo Zylberstajn, Helio Zylberstajn and Luis Eduardo Afonso
This paper solves and estimates a stochastic model of optimal inter-temporal behavior to assess how
changes in the design of the income protection and pension systems in Brazil could affect savings rates,
the share of time that individuals spend outside of the formal sector, and retirement decisions. Dynamics

depend on five main parameters: preferences regarding consumption and leisure, preferences regarding
formal vs. informal work,attitudes towards risks, the rate of time preference, and the distributions of two
exogenous shocks that affect movements in and out of the social security system (independently of
individual decisions).
The Portability of Pension Rights: General Principals and the Caribbean Case
Social Protection Discussion Paper No. 0825; Publication Date: 2008/05
by Alvaro Forteza
The portability of pension rights is an increasingly important issue in the Caribbean. The large and
increasing flows of migrant workers, including both permanent and temporary migrants, the small size of
the domestic economies and the process of regional integration and economic openness call for effective
means to make pensions portable. This document presents a select survey of the literature on pension
portability and reviews the progress made by the Caribbean countries as well as some remaining
challenges in the light of the international experience.
Pension Systems and Reform Conceptual Framework
Social Protection Discussion Paper No. 0824; Publication Date: 2008/06
by Robert Holzmann, Richard Paul Hinz and Mark Dorfman
The World Banks conceptual framework to assess pension systems and reform options evaluates initial
conditions and the capacity to improve the enabling environment, then focuses on how best to work
within these to achieve the core objectives of pension systems - protection against the risk of poverty in
old age and smoothing consumption from ones work life into retirement. The Bank applies a multipillared approach towards pension system modalities to address the needs of target populations
including: (i) a non-contributory zero pillar extending some level of old-age income security to all of the
elderly; (ii) an appropriately sized mandatory first pillar with the objective of replacing some portion of
lifetime pre-retirement income through contributions linked to earnings; (iii) a funded mandatory definedcontribution second pillar that typically provides privately-managed individual savings accounts; (iv) a
funded voluntary third-pillar; and (v) a non-financial fourth pillar. The primary evaluation criteria are the
ability of the system to maintain adequacy, affordability, sustainability, equity, predictability and
robustness. The secondary evaluation criteria are the systems capacity to: minimize labor market
distortions; contribute to savings mobilization; and contribute to financial market development. Because
pension benefits are claims against future economic output, it is essential that over time pension systems
contribute to growth and output to support the promised benefits. Going forward, the Bank is focusing on
strengthening its support in: (a) establishing a clearer results framework to assess pension systems and
reforms; (b) enhancing knowledge management, including research and learning; and (c) improving
implementation capacity.
Pension Lending and Analytical Work at the World Bank: FY2002-2007
Social Protection Discussion Paper No. 0811; Publication Date: 2008/05
by Richard Hinz, Melike Egelmelzer and Sergei Biletsky
This paper presents an overview of the World Banks lending and knowledge building activities that have
improved pension systems in client countries during the past two decades. The objectives of this report
are: 1) to describe the policy framework that has guided the Banks work on pension related issues and
2) to present relevant information about the nature and extent of the Banks lending and policy advisory
work in this area and 3) to discuss some of the results that have been achieved through this work as well
as future policy directions.
Disability Insurance with Pre-funding and Private Participation: The Chilean Model
Social Protection Discussion Paper No. 0719; Publication Date: 2008/01
by Estelle James, Augusto Iglesias and Alejandra Cox Edwards
The disability insurance system in Chile is much less well-known than the pension part, but it is equally
innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely prefunded - through the accumulation in the retirement account and later through an additional payment

made when the person becomes permanently disabled, sufficient to cover a lifetime defined benefit
annuity; and 2) the disability assessment procedure includes participation by private pension funds
(AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in
controlling costs. Survivors insurance is handled in the same way, through a combined D&S fee. the
authors argue that pre-funding will raise disability fees in the early years of a new system as funds are
built up but reduce them in the long run as benefits are covered out of accumulated funds. the authors
further hypothesize that the participation of private pension funds in the assessment procedure will keep
system costs low, by cutting the incidence of successful disability claims. Finally, the authors expect that
these incentives will also lead to cost-shifting - to other AFPs by selection and to the public treasury via
the minimum pension guarantee (MPG). Using simulations based on a special data set that was provided
to us by the Association of AFPs and applying the Cox proportional hazard model to a retrospective
sample of new and old system affiliates (ESP 2002), the authors conclude that these hypotheses are
broadly consistent with observed behavior.
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2007
The Life-Course Perspective and Social Policies: An Issues Note
Social Protection Discussion Paper No. 0719; Publication Date: 2007/11
by A.L. Bovenberg
A number of trends are changing the nature of social risks and increase the importance of human capital,
adaptability and flexibility. This paper discusses the usefulness of a life-course perspective in developing
proactive social policies that better fit the changing life cycles of individuals who combine formal work
with other activities on transitional labor markets. It pays special attention to the accumulation and
maintenance of human capital over the life course and stresses that reconciliation of work and family
goes beyond child-care facilities and parental leave, and involves the entire life course. In particular,
longer and deeper involvement in paid employment allows people to exploit their longer life to reconcile
the two ambitions of, first, investing in the next generation as a parent and, second, pursuing a fulfilling
career in paid work in which one keeps learning. Greater flexibility of working time over the life course
requires more individual responsibility for financing leave. Moreover, rather than shielding older insiders
through employment protection, labor-market institutions should enable parents of young children to
easily enter and remain in the labor market. Finally, more activating social assistance and in-work
benefits should replace the passive income support for breadwinners that results in high minimum-wage
floors.
The Kosovo Pension Reform: Achievements and Lessons
Social Protection Discussion Paper No. 0707; Publication Date: 2007/04
by John Gubbels, David Snelbecker and Lena Zezulin
This paper tells the story of the Kosovo reform and draws policy and implementation lessons from the
experience. The paper discusses policy issues and implementation experience in great detail, to serve as
a resource for others interested in various aspects of the Kosovo reform. Readers who want to
understand an overview of the reform and key lessons drawn from the experience may wish to turn
immediately to: Section II.2, which presents an overview of the three pillars; Sections III.7 and IV.18,
which present the specific challenges confronted in implementing Pillars I and II, respectively; and
Section VI, which summarizes the lessons learned about policy and implementation issues from the
Kosovo reform experience.
Aging and Demographic Change in European Societies: Main Trends and Alternative Policy Options
Social Protection Discussion Paper No. 0703; Publication Date: 2007/03
by Rainer Muenz
This paper gives an overview on current demographic trends and projected population change in Europe
and neighboring regions. The main focus of the analysis is on Western and Central Europe. Today this
world region has a total population of 500 million. Available forecasts until the year 2050 project a decline

of the population at working age, a subsequent decline of the (native) work force and a parallel increase
in the number of retired people. The paper discusses policy options by demonstrating the impact of
possible changes in labor force participation, higher retirement age and pro-active recruitment of migrant
labor on population size and future labor force.
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2006
An Assessment of Reform Options for the Public Service Pension Fund in Uganda
World Bank Policy Research Working Paper 4091, 2006/12
by Tatyana Bogomolova, Gregorio Impavido and Montserrat Pallares-Miralles
This paper analyzes the future liabilities that the Ugandan Public Service Pensions Fund might
accumulate under the provisions of CAP 286, unless it is reformed. It then discusses alternative reform
options that can be used as input in designing an educated homegrown reform of the fund. The paper
supports a hybrid (two-pillar) reform option composed by a small defined benefit scheme and a
complementary defined contribution scheme, instead of a pure defined contribution (monopillar) reform
option discussed by policymakers in the country. The main reason for this is related to the fact that hybrid
and pure defined contribution reforms will have the same impact on reducing pension expenditure (for
same grandfathering rules and surplus in the first pillar). In addition, everything else being equal, the
hybrid reform is likely to produce higher average replacement rates due to the redistributive and pooling
properties of the small DB pillar.
Pension Systems in Latin America: Concepts and Measurements of Coverage
Also available in Spanish - This version is dated 2006/11
Social Protection Discussion Paper No. 0616; Publication Date: 2008/10
by Rafael Rofman and Leonardo Lucchetti
This paper presents a new stage in the efforts by the authors to produce a reliable estimation of coverage
indicators in the region. This project started in 2004-05 with the analysis of a coverage data for a smaller
group of countries around 2002 (Rofman and Carranza, 2005), as was significantly revised and
expanded, to include time series beginning in the mid 1990s in 2006-07. This version presents a new
expansion in the time series of indicators, going now from 1990 to 2006, and included additional
countries in the region. Of course, the data still present gaps, and comparability problems originated on
differences in the sources are still present, as explained in the methodological annex.
The Relative Merits of Skilled and Unskilled Migration, Temporary and Permanent Labor Migration, and
Portability of Social Security Benefits
Social Protection Discussion Paper No. 0614; Publication Date: 2006/11
by Johannes Koettl under guidance of and with input from Robert Holzmann and Stefano Scarpetta
In March 2006, the G-20 established a study group on labor mobility and demographics. The World
Banks Social Protection and Labor unit (HDNSP) was asked to provide an issues paper on the relative
merits of skilled and unskilled migration, temporary and permanent labor migration, and portability of
social security benefits. The objective of this paper is: (i) to highlight the relative merits of skilled and
unskilled migration for both source and destination countries; (ii) to highlight the relative merits of
temporary and permanent migration for source and destination countries; and (iii) to highlight the costs
and benefits of enhanced portability of social security benefits and its impact on incentives for migrants
and migration outcomes.
Comparing Individual Retirement Accounts in Asia: Singapore, Thailand, Hong Kong and PRC
Social Protection Discussion Paper No. 0609; Publication Date: 2006/09
by Yasue Pai
This paper compares the different approaches of Singapore, Thailand, Hong Kong, and China with

respect to how they manage their respective defined contribution, individual retirement account systems.
The four cases illustrate important differences in terms of some of the key issues in design of DC
schemes; the role of government versus private sector, investment policy and individual choice, among
others. They also provide a useful contrast in terms of initial conditions.
Pension System Reforms
Pension System Reforms
Social Protection Discussion Paper No. 0608; Publication Date: 2006/09
by Anita Schwarz
In typical pension systems, individuals are asked to make contributions and based on the number of
contributions made and the level of those contributions, a pension is awarded. Contributions from
workers generally finance these pensions. Since higher income individuals tend to make more frequent
contributions due to a more stable work history and higher contributions based on their higher wages,
pension expenditures are naturally skewed toward those who paid for them, the higher income
individuals. The normal tools for poverty and social impact analysis are often not applicable given the
contributory nature of the systems. The paper looks at these issues, provides a framework in which to
view pension reforms, and provides some pension-specific tools which do allow a sensible poverty and
social impact analysis to take place.
Civil-service Pension Schemes Around the World (430kb pdf)
Social Protection Discussion Paper No. 0602; Publication Date: 2006/05
by Robert Palacios and Edward Whitehouse
There are separate pension schemes for civil servants in about half of the worlds countries, including
some of the largest developing economies, such as Brazil, China and India. In the higher-income, OECD
countries, spending on pensions for public-sector workers makes up one quarter of total pension
spending. In less developed countries, this proportion is usually higher. Yet, very little has been written on
the design and reform of civil-service pension plans, especially when compared with the voluminous
literature on national pension programs.
This paper compares civil service pension schemes across countries in terms of benefit provision and
cost. The authors find that in many developing countries, these expenditures are a greater fiscal burden
than in higher income countries where the tax base is larger. The paper also compares schemes within
the same country covering private sector workers. Finally, the authors review key policy issues related to
pension schemes covering civil servants as well as other public sector workers. In particular, the authors
find that there is little justification for maintaining parallel schemes in the long run.
Social Pensions Part I: Their Role in the Overall Pension System
Social Protection Discussion Paper No. 0601; Publication Date: 2006/05
by Robert Palacios and Oleksiy Sluchynsky
Cash transfers for the elderly with little or no link to previous contribution or work history are employed in
many countries to provide income support for the elderly. In the context of the larger debate over pension
reform, some argue that these social pensions are an effective way to deal with chronically low
coverage of contributory schemes and to alleviate poverty among the elderly. This paper reviews the
global experience with social pensions. The authors find that coverage and cost of these programs varies
widely and that the appropriate role for social pensions should take into account several country-specific
conditions. The extent of coverage of the contributory scheme, the extent of other social assistance
programs and the relative poverty status of the elderly are among the factors that should be considered.
Design and implementation issues will be reviewed in Part II.
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2005

Japans Pension Reform (666kb pdf)

Social Protection Discussion Paper No. 0541; Publication Date: 2005/12
by Junichi Sakamoto
Rapid population ageing has led to repeated adjustments to the parameters of Japans public pension
scheme over the last decade all aimed at achieving long run financial balance. The most recent attempt,
describe in this paper, introduces an adjustment mechanism that links future benefit levels to the
underlying determinants of the schemes finances. This mechanism is similar to those recently introduced
in Germany and, to a lesser extent, in Sweden and fundamentally alters the concept of the defined
benefit. Changes to how pension reserves are invested are also described. Finally, the benefit reductions
in the public scheme and recent regulatory changes suggest an increased future role for complementary
private provision.
The New Pensions in Kazakhstan: Challenges in Making the Transition
Social Protection Discussion Paper No. 0537; Publication Date: 2005/09
by Richard P. Hinz, Asta Zviniene and Anna-Marie Vilamovska
In June of 1997 Kazakhstan embarked on a dramatic reform of its pension system, replacing the
inherited pay as you go regime with one based entirely on fully funded individual accounts. The paper
provides projections of the effects of this reform on income replacement rates and considers some
possible adjustments to the system design, including those enacted in early 2005, that could address the
projected outcomes of the reform. The initial reform which did not include any minimum pension
guarantee is projected to result in a significant reduction in the individual income replacement rates
derived from the pension system, especially for women. When the reform was mature and the old system
fully phased out, women are projected to have received pensions at level of less than 15 percent of their
pre-retirement earnings. Various potential adjustments to the reform, including the recent introduction of
a citizens pension or "demogrant", are found to have the capacity to significantly raise these income
replacement rates. The fiscal costs of alternatives are found to vary considerably due significantly to the
degree to which they would target expenditures to lower income groups. The analysis of the original
reform design and possible adjustments provides some useful lessons about the design of individual
account systems in transition economies.
Pension Supervision: Understanding International Practice and Country Context
Social Protection Discussion Paper No. 0524; Publication Date: 2005/05
by Richard P. Hinz and Anca Mataoanu
This paper proposes an approach to classifying and measuring the primary elements of private pension
supervision and undertakes an evaluation using a representative set of countries. The analysis considers
how supervision methods and style relate to the basic design of pension systems and the broader
environment in which they operate. Supervisory systems are shown to include six main elements, with
considerable variation among systems in the scope and intensity of activities within each element. The
analysis concludes that there are discernible relationships between supervisory methods and the context
in which they are applied. The level of economic development, depth of capital markets, underlying legal
framework presence of mandates, and number of funds supervised are found to be associated with
depth and intensity of supervision activities. These findings support the principle that the organization and
management of private pension supervision is significantly derived from the context and environment in
which these systems operate.
Social Security Coverage in Latin America
Social Protection Discussion Paper No. 0523; Publication Date: 2005/05
by Rafael Rofman
The debate on social security coverage has been complicated by a lack of consistent quantitative
information that would allow for rigorous comparisons of different countries and different time spans.
Although many recently published articles and opinions include statistics, their sources and calculations
methodology are not always clear. For that reason, the publication of coverage information in a significant
number of the regions countries, calculated simultaneously and based on similar data, makes an

important contribution to clarifying the debate and developing specific proposals for problem solving.
Aging and Poverty in Africa and the Role of Social Pensions
Social Protection Discussion Paper No. 0521; Publication Date: 2005/05
by Nanak Kakwani and Kalanidhi Subbarao (online only)
In many low income African countries, three factors are placing an undue burden on the elderly. First, the
burden on the elderly has enormously increased with the increase in mortality of prime age adults due to
HIV AIDS pandemic and regional conflicts. Second, the traditional safety net of the extended family has
become ineffective and unreliable for the elderly. Third, in a few countries, the elderly are called upon to
shoulder the responsibility of the family as they became the principal breadwinners and caregivers for
young children. While a number of studies have examined the welfare consequences of these
developments on children, few studies have systematically analyzed the poverty situation among the
elderly (relative to other groups) in low income countries Africa, and the role of social pensions. This
study aims to fill this gap.
Portability Regimes of Pension and Health Care Benefits for International Migrants: An Analysis of
Issues and Good Practices. Also available in French.
Social Protection Discussion Paper No. 0519; Publication Date: 2005/05
by Robert Holzmann, Johannes Koettl, and Taras Chernetsky
The paper provides a first investigation into the portability of pension and health care benefits for
international migrants. It is based on available literature and newly minted data, but more importantly on
selective case studies from main migrant-sending and receiving countries. While exploratory, the paper
achieves a better understanding of the realities on the ground and is able to distill key issues as well as
identify good and best practices. The main conclusions include the following: First, only around 20
percent of migrants worldwide work in host countries where full portability of pension benefits, but not
necessarily of health care benefits, to their home countries is ensured. Second, bilateral agreements are
seemingly the current best practice to ensure portability for pension and health care benefits, although for
the latter this is not always the case. Third, more actuarial-type structures should help to enhance
portability. This is, in principle, straightforward for pensions and a defined contribution-type design. It is
much more complicated for health care benefits. Last but not least, for improved benefit design and
implementation, the information base needs to be broadened, including through more country case
studies and tracer studies of migrants.
Pension Reform in El Salvador
Social Protection Discussion Paper No. 0507; Publication Date: 2005/04
by Rodrigo Acua
El Salvador implemented a systemic pension reform in 1998. The publicly-managed, defined benefit and
unfunded pension schemes for formal sector workers were replaced by a privately-managed scheme
with individual accounts. The experience during the first five years of the reform has been marred by
problems related to the valuation of accrued rights in the old scheme and government intervention. There
are also growing concerns about market concentration in a country where only two pension fund
managers compete in a system which is mandatory for all formal sector workers. The case of El Salvador
raises the question as to whether a small country with limited governance capacity can succeed with this
reform model.
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2004
Safety Nets for the Elderly in Poor Countries: The Case of Nepal (311kb pdf)
Publication Date: 2004/05, DRAFT - PLEASE DO NOT CITE
by Robert J. Palacios and S. Irudaya Rajan
Cash transfer programs specifically targeted toward the elderly can be divided into demogrant and

means-tested schemes. The latter apply some test of need while demogrants are paid to all citizens that
reach a particular age. While means-tested programs are fairly common, there are only about a dozen
examples of the demogrant or universal flat pensions. Nepal is one of the few low income countries and
the only South Asian country with a demogrant. In principle, it pays a modest pension to all Nepalese
citizens age 75 and over. There is also a means-tested pension for widows over age 60. This paper
analyzes the safety net for the elderly in Nepal through its first nine years of operation at the national,
regional and local levels. The preliminary conclusions are that (i) current and projected spending is
modest due to low benefits and a high eligibility age; (ii) while around three-fourths of the eligible
population receives the benefit, there are significant differences across Nepal's 75 districts; (iii) the
results of a special (albeit unrepresentative) survey suggest that transaction costs and corruption are
minimal and (iv) the reliance on Village Development Committees (VDCs) to administer the scheme may
allow for significant variation in the efficacy of implementation. The future role of the demogrant should be
determined as part of a coherent overall pension policy.
Toward a Reformed and Coordinated Pension System in Europe: Rationale and Potential Structure
Social Protection Discussion Paper No. 0407; Publication Date: 2004/04
by Robert Holzmann
The need for a rapid and comprehensive reform of the pension systems in most current and future
member countries of the European Union is increasingly acknowledged by individuals and politicians.
National efforts can now draw support on intensified EU cooperation which is based on the Open Method
for Coordination. Yet, this method takes the diversity of European pension design as a given, and much
of the reform debate is still limited to fiscal issues at national levels. This paper (i) reviews the reform
needs of the pension systems for fiscal, economic and social reasons; (ii) makes the case for a move
toward a more coordinated pension system in Europe; and (iii) sketches how such a system may look
like and come about. The central claim of the paper is that a multi-pillar system, with a non-financial (or
notional) defined contribution (NDC) system at its core, and coordinated supplementary funded pensions
and social pensions at its wings is an ideal approach to deal with diverse fiscal and social reform needs.
The approach would also introduce a harmonized structure while allowing for country-specific
preferences with regard to coverage and contribution rate. Such a reform approach may lead to a PanEuropean reform movement as a number of countries did or plan to introduce NDCs, and others may
easily convert their point system into an NDC structure.
Implicit Pension Debt: Issues, Measurement and Scope in International Perspective
Social Protection Discussion Paper No. 0403; Publication Date: 2004/03
by Robert Holzmann, Robert Palacios and Asta Zviniene
This paper argues that it is important to take into account unfunded public pension liabilities as part of an
assessment of the overall fiscal situation, including the fiscal positions of pension schemes pre and post
reforms. It examines the concept of the implicit pension debt (IPD) and presents estimates for 35 low and
middle income countries based on a consistent methodology and assumptions. The policy conclusions
stress the need for standardized international reporting of this indicator.
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2003
Pension Reform in the Dominican Republic
Social Protection Discussion Paper No. 0326; Publication Date: 2003/12
by Robert J. Palacios
Arguably, the most important public policy initiative under way today in the Dominican Republic is the
reform of its social security programs. The reform is taking place in the context of an economic crisis that
will make a complex implementation process even more difficult in the first few years. In the longer run,
the complete overhaul of the health and pension systems will have a major impact beyond social policy. It
will affect labor markets, fiscal policy and even financial markets. In terms of the country's economic
development, much is at stake. This paper describes the systemic pension reform introduced by

legislation in 2001 but implemented only in mid-2003.

Disability Pensions and Social Security Reform: Analysis of the Latin American Experience
Social Protection Discussion Paper No. 0325; Publication Date: 2003/12
by Carlos O. Grushka and Gustavo Demarco
This paper describes the disability pension arrangements prevailing in ten Latin American countries that
reformed their pension systems. The analysis is limited to the topic of disability pensions, without
attempting to evaluate other critical aspects such as the available infrastructure: handicapped access
generally (ramps, blind cues), medical and nursing support, home care, and so on. The relative
significance of disability pensions is highly dependant on these factors and, however, they are really
limited in most countries of Latin America.
Governance of Public Pension Funds: New Zealand Superannuation Fund (281kb pdf)
Publication Date: 2003/05
by Brian McCulloch and Jane Frances
After briefly reviewing the context behind the policy and the policy objective, this paper examines the
resulting key design elements of the governance framework for the New Zealand Superannuation Fund
that attend to each element of that objective: clearly defining the Fund, placing an appropriate level of
independence around the governing body, providing explicit legislated commercial investment objectives,
and establishing a robust accountability framework. Finally, the paper briefly reviews the experience of
implementation to date, and also summarizes the arrangements surrounding the governance of other
portfolios of financial assets owned by the Crown in New Zealand.
Ageing and Pensions in the Euro Area: Survey and Projection Results
Social Protection Discussion Paper No. 0307; Publication Date: 2003/03
by P. C. Rother, M. Catenaro and G. Schwab
Population ageing will impose a significant burden on European fiscal balances, in particular through
pay-as-you-go pension systems. This study presents an independent estimate of this burden for the euro
area and quantifies the impact of two reform scenarios. Based on widely used but optimistic
assumptions, the present value of future pension deficits through 2050 is estimated at 51% of GDP,
adding to the current average explicit debt stock of around 67% of GDP. In this calculation, the deficits
currently incurred by many pension systems as revenues fall short of expenditures are not included.
Viable parametric reforms represent no durable solution to alleviate the burden sufficiently, as they can
balance pension systems at best temporarily. A comprehensive reform, including reforms of current
systems and a move towards partial funding, is found to ensure permanent financial viability of the public
pension system.
Pension Reform in Croatia
Social Protection Discussion Paper No. 0304; Publication Date: 2003/02
by Zoran Anusic, Philip O'Keefe and Sanja Madzarevic-Sujster
Croatia's transition toward independence and the market economy in the 1990s exacerbated problems in
the PAYG DB system and ultimately led to its financial collapse. Although a comprehensive three-pillar
reform was initiated in late 1995, implementation of the reform only began in 1998 with an overhaul of
PAYG parameters, including shifting to a German-style points system. Introduction of the mandatory and
voluntary funded pillars was announced in 1998 and implemented in 2002. The new system includes a
privately-managed individual account scheme with a contribution rate of 5 percent in addition to a
downsized pay-as-you-go, defined benefit component. This paper describes the design of the new
system and highlights areas where further refinements are needed.
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2002

Managing Public Pension Reserves Part II: Lessons from Five Recent OECD Initiatives
Social Protection Discussion Paper No. 0219; Publication Date: 2002/07
by Robert J. Palacios
A large number of public pension schemes around the world have accumulated significant reserves.
Prefunding might reduce the risk that future governments will not be able to meet pension obligations.
The management of these funds therefore, has a direct effect on financial sustainability and potential
benefit levels. It also has important indirect effects on the overall economy, especially when the funds are
large relative to domestic capital markets. In the past, most public pension funds have not been invested
effectively, largely because of political interference. This paper reviews strategies for limiting risks that
arise when a public entity is entrusted with managing national pension savings. In particular, an attempt
is made to draw lessons from recent reforms in five OECD countries.
Czech Pension System: Challenges and Reform Options
Social Protection Discussion Paper No. 0217; Publication Date: 2002/06
by Esperanza Lasagabaster, Roberto Rocha and Patrick Wiese
The purpose of the paper is to review the structure and performance of the Czech pension system and
examine alternative reform options. The paper shows that in the absence of reform the deficits of the
Czech pension system may exceed 8 percent of GDP in 2050. To contain these deficits the paper explore
two major PAYG reform options. The first major option is a standard parametric reform that preserves the
defined benefit (DB) scheme. The second major option involves parametric reforms combined with a
switch to a notional defined contribution (NDC) scheme. The paper shows that the NDC cum parametric
reforms would automatically tighten the link between contributions and benefits and be more resilient to
unpredicted demographic shocks. However, both the DB and the NDC options would produce a
significant reduction in replacement rates, especially for young generations. To avoid an excessive drop
in replacement ratios the authorities should make an effort to increase coverage of the third pillar and
improve the regulatory framework for third pillar funds. The authorities may also have to consider
introducing a second pillar to ensure universal coverage, especially of young workers. Introducing a
second pillar will be easier if the PAYG reforms start immediately. This is because an early
implementation of the PAYG reforms would produce a significant improvement of the PAYG and offset at
least partly the revenue losses arising from the diversion of contributions to the second pillar.
The Reformed Pension Systems in Latin America (262kb pdf)
Social Protection Discussion Paper No. 0209; Publication Date: 2002/05
by Jos E. Devesa-Carpio and Carlos Vidal-Meli
The transformation of the public pension system in Chile, which has served as a model for later reforms
carried out in other Latin American countries, has attracted the attention of many researchers. The aim of
this paper is to make a (provisional) technical assessment of the functioning of these systems. The
operating structure is described and the main characteristics are analyzed. Main indicators are discussed
including rates of return, level of pensions provided, actual coverage, administration costs, size and
composition of fund portfolios, level of implicit pension debt, transition costs, and the problems arising
due to the existence of alternative methods of pensions provision.
Mandatory Annuity Design in Developing Economies
Social Protection Discussion Paper No. 0208; Publication Date: 2002/05
by Suzanne Doyle and John Piggott
Pension policy has become one of the more volatile areas of economic reform in recent years. The onset
of demographic transition, combined with concerns about the efficiency effects of a large public sector,
has prompted a search for pension reform options that reduce governments' responsibility for direct
financial support for the retired. This process is common to developing and developed economies alike.
This paper explores the appropriate development of policy towards mandatory retirement-income
streams within this broad framework, paying particular attention to the economic environments relevant
to developing economies.
Pension Reform and Capital Markets: Are There Any (Hard) Links?
Social Protection Discussion Paper No. 0201; Publication Date: 2002/02
by Eduardo Walker and Fernando Lefort

The creation of fully funded, privately managed pension systems may have significant positive direct
effects on savings, growth, and welfare. However, the indirect link, via capital market development, may
be as important. This hypothesis is verified with evidence from emerging economies that have recently
engaged in such reforms with a focus on Chile, Argentina and Peru. There is abundant qualitative and
anecdotal evidence that relates pension reform with the accumulation of "institutional capital", with the
existence of an adaptive legal framework, with increased specialization, transparency and integrity and
even with better corporate governance. Evidence of increased financial innovation is also found while
there is little evidence of bank disintermediation. In addition, time-series and panel data evidence is
generally consistent with the following hypothetical effects: a reduction in the cost of capital; lower
security-price volatility; and higher traded volumes. The evidence suggests that the indirect channel via
capital market development may have important implications for economic growth and productivity.
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2001
Chile's Pension Reform After 20 Years
Social Protection Discussion Paper No. 0129; Publication Date: 2001/12
by Rodrigo Acua R. and Augusto Iglesias P.
The aim of this paper is to describe the 1980 Chilean pension reform and to present its main results and
economic impact. It is mainly descriptive; however the authors have tried to emphasize the lessons that
may be learned and that may be of interest to other countries in different circumstances. In particular, the
authors focus on potential areas for regulatory improvements. In Section II, a brief description of the AFP
system and its place within Chile's social security system is presented. Also, the main characteristics of
the transition from the "old" to the new system are sketched, together with the main changes in regulation
after 1980. Section III includes a history of pension reform in Chile along with an analysis of the
circumstances which may explain why the country decided to introduce such a radical reform. In Section
IV, the performance of the AFP system is summarized. In Section V, the main economic effects of
pension reform are discussed. Section VI presents the authors' view regarding future development in the
regulation of the AFP system. The paper concludes with some comments on the timing of possible
regulatory changes.
Generational Accounting and Hungarian Pension Reform (96kb pdf)
Social Protection Discussion Paper No. 0127; Publication Date: 2001/10
by Rbert I. Gl, Andrs Simonovits and Gza Tarcali
The essence of generational accounting is to break down total net contributions in a given year to each
cohort and to project this profile into the future. Using additional assumptions on the discount rate and
the growth of productivity and population, the per capita net contribution of future generations can be
determined, which satisfies the inter-temporal budget constraint. Generational accounts in the Hungarian
pension system show that the 1997 reform package significantly reduced the financial tension generated
by demographic and institutional factors. The main source of improvement was a rationalization of social
security. These conclusions are robust. Nevertheless, future imbalances depend on the dynamics of
model parameters, primarily the rate of productivity growth.
Individual Accounts as Social Insurance: A World Bank Perspective
Social Protection Discussion Paper No. 0114; Publication Date: 2001/06
by Robert Holzmann and Robert Palacios
The trend toward including individual accounts as part of the mandatory pension system continues
unabated. Nine Latin American countries have introduced individual accounts (Chile, Peru, Argentina,
Colombia, Uruguay, Bolivia, Mexico, El Salvador and Nicaragua) and several more are preparing to do so
(Ecuador, Dominican Republic). A similar trend has emerged in Europe where the former socialist
countries are taking the lead: Hungary, Kazakhstan, Latvia and Poland have already passed reform
legislation and many others including Croatia, Estonia, Macedonia, Romania and the Ukraine are
preparing their own versions. There is also movement in this direction in Western Europe, even in
countries with large, state defined benefit plans like Sweden. Several Asian versions of the individual
accounts strategy are also emerging, ranging from the gradually liberalization of Singapore's Central

Provident Fund to Hong Kong's new, employer based, defined contribution scheme. In fact, reforms that
assign an important role to individual accounts are being discussed in dozens of countries in every region
of the world. This brief note states the broad arguments for individual accounts. The structure of the
paper is as follows: Section II provides some needed clarification on "individual accounts", Section III
outlines the main arguments for individual accounts while Section IV concludes.
Australia's Mandatory Retirement Saving Policy: A View from the New Millennium
Social Protection Discussion Paper No. 0108; Publication Date: 2001/03
by Hazel Bateman and John Piggott
Formal retirement income provision in Australia can be traced back to occupational superannuation
schemes first offered by banks and state governments in the 19th century. However, the year 1909 marks
the beginning of a national retirement income policy with the introduction of a means-tested age pension.
Since then retirement income provision has evolved into a multi pillar arrangement comprising the Age
Pension, occupational superannuation and other long term saving through property, shares and
managed funds. The 1990s saw the introduction of private mandatory retirement saving in the form of the
Superannuation Guarantee. With the introduction of the Superannuation Guarantee, Australia joined a
growing group of countries which centre their retirement income policy on private mandatory retirement
saving. This paper provides a succinct description of the current system along with an analysis of its
strengths and areas where improvement is still needed.
Annuity Markets and Benefit Design in Multipillar Pension Schemes: Experience and Lessons from
Four Latin American Countries
Social Protection Discussion Paper No. 0107; Publication Date: 2001/03
by Robert Palacios and Rafael Rofman
A growing number of countries have introduced mandatory defined contribution schemes. As these
schemes mature, their success will increasingly depend on how well they translate accumulated funds
into a stream of retirement income. Successful reforms will rely on a well regulated and competitive
insurance sector. They will strike a balance between individual preferences and public policy objectives
such as providing a reasonable amount of longevity insurance. This paper describes the benefit stage in
four Latin American countries and presents preliminary evidence on their emerging annuities markets.
We find that these markets are less transparent than they should be and that supervision is less strict
than during the accumulation period. Annuities markets will grow dramatically in the coming decades as
the reforms mature. Growth depends on policy variables such as the use of recognition bonds as well as
initial conditions. The markets in Peru and Colombia will be much smaller than those in Chile and
Argentina in both absolute and relative terms. The immaturity of the schemes and temporarily limited flow
of new pensioners should be viewed as a window of opportunity for improving supervision, increasing
transparency and educating workers.
Kazakhstan: An Ambitious Pension Reform
Social Protection Discussion Paper No. 0104; Publication Date: 2001/01
by Emily S. Andrews
The pension reform in Kazakhstan was instituted to remove a deteriorating and costly pay-as-you-go
(PAYGO) system with limited revenues, a relatively low worker to pensioner ratio, and accumulating
pension arrears. Analysis was conducted to assess whether the economy could sustain a radical reform,
which would make the implicit pension debt explicit. The first section of this report reviews the reform and
provides a synopsis of the thinking behind its development, including the events leading up to it and the
failings of the PAYGO system. In the second section, the administrative, business, and regulatory
structures created by the pension reform legislation are described. In the third section, the progress of
these entities in meeting the objectives of the reform is evaluated, particularly in terms of regulatory and
financial market performance.
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2000
Contractual Savings or Stock Market Development: Which Leads?

Social Protection Discussion Paper No. 0020; Publication Date: 2000/08

by Mario Catalan, Gregorio Impavido and Alberto R. Musalem
This paper studies the relationship between the development of contractual savings (assets of pension
funds and life insurance companies) and capital markets. The focus is on the macroeconomic and
financial effects of contractual savings' development. New theoretical ideas and empirical results are
presented. At the theoretical level, we explain how the growth of the contractual savings sector promotes
financial development and economic growth through different channels. The authors argue that among
institutional investors, contractual savings institutions are the most effective at developing capital
markets. What is different about contractual savings is that their liabilities are long-term and illiquid assets
in asset holders' portfolios. At the empirical level, the authors analyze Granger causality between
contractual savings and both market capitalization and value traded in stock markets for some OECD
and other countries. The evidence suggests that the growth of contractual savings cause the
development of capital markets.
Pension Reform and Public Information in Poland
Social Protection Discussion Paper No. 0019; Publication Date: 2000/08
by Agnieszka Chlon
The introduction of a new pension system in Poland in 1999 was the culmination of a long policy dialogue
and years of debate. During this period, the role of public opinion shaped the reform and was shaped by
the reform process. Implementation of the reform will also be affected by the quality of information
available to the public and their financial literacy. In contrast to their passive role in the old public,
defined-benefit schemes, Poles that chose to divert their contributions to individual, defined-contribution
accounts must now take an active role in the new system. This paper documents the fascinating
evolution of public opinion and its affects on the reform process as well as the early experiences of
millions of Poles who, for the first time, are faced with the challenge of choice as consumers in the new
market for pension services.
Regulating Private Pension Funds' Structure, Performance and Investments: Cross-country Evidence
Social Protection Discussion Paper No. 0113; Publication Date: 2000/07
by P.S. Srinivas, Edward Whitehouse and Juan Yermo
Because defined-contribution systems expose pensions to a number of risks, reforming governments
have often strictly regulated the pension fund industry's structure, performance, and investments. This
paper compares the rules in the new systems of Latin America and eastern Europe with richer OECD
countries. The authors argue that the benefits of competing pension funds and individual choice can only
be achieved if regulations are loosened in the medium term.
How Poor are the Old? A Survey of Evidence from 44 Countries
Social Protection Discussion Paper No. 0017; Publication Date: 2000/06
by Edward Whitehouse
This paper surveys 11 international comparative studies of poverty, income distribution and the elderly.
Although it focuses on OECD economies, some 44 countries are covered. The paper addresses a series
of questions. What level are the incomes of the elderly relative to the population as a whole? How has
this changed over the past two decades? How many of the old are poor? How many of the poor are old?
Are the oldest old poorer than younger pensioners? How do widows fare? What is the mix between
public and private sources of income? Do the elderly poor remain poor? There is also a discussion of
methodological issues. The results show that the incomes of the elderly are typically around 80 per cent
of incomes of the populations as a whole. In most countries, this ratio has been increasing over the past
two decades. Although there remain pockets of poverty among the elderly, most studies show that the old
are represented proportionally or under-represented among the poor.
Administrative Charges for Funded Pensions: An International Comparison and Assessment
Social Protection Discussion Paper No. 0016; Publication Date: 2000/06
by Edward Whitehouse
Pension fund charges reduce the rate of return on pension accounts in some countries by up to by two
percentage points. Do charges of this scale undermine the case for funded pension provision? How can

governments hold back costs and charges? This paper looks at evidence from thirteen countries, with
policies ranging from complete liberalization of charge levels of structures to government imposed charge
ceilings. The author stresses the trade-offs in limiting charges, especially in reduced competition and
choice.
The Pension System in Argentina: Six Years After the Reform
Social Protection Discussion Paper No. 0015; Publication Date: 2000/06
by Rafael Rofman
In a context of a serious financial and legal crisis, Argentina reformed its Pension System in 1994, when
a multipillar model with a funded scheme was introduced and first pillar parameters, as minimum age and
vesting requirements were tightened. The new system has a significant first pillar (which offers a flat
benefit currently valued at 28% of average wage to all retirees) and a second pillar that should provide a
similar amount, once the transition is completed. The new system has developed rapidly and most formal
workers have joined the new funded scheme. However, there are some problems that must be resolved.
In the first pillar, the reform balanced long term finances, but it will also reduce coverage very rapidly, as
a consequence of the combined effect of low formality in the labor market and stricter contribution
requirements. The most serious problems in the funded pillar are the administration costs and the need
to improve regulation and supervision of insurance companies, that provide disability and survivors
coverage and annuities to beneficiaries. While these problems are important, their consequences can be
avoided if adequate policies are developed by the Government. In this sense, the experience of the
pension reform in Argentina is an excellent lesson for other countries that are considering a reform in
their own systems.
Pension Systems in East Asia and the Pacific: Challenges and Opportunities
Social Protection Discussion Paper No. 0014; Publication Date: 2000/06
by Robert Holzmann, Ian W. Mac Arthur and Yvonne Sin
With the recovery from the recent crisis, countries of the East Asia and Pacific region are rethinking their
financial and social policy, including old-age protection. Population aging, in combination with ongoing
urbanization and economic transformation, will place increasing pressure on traditional family care
arrangements. Coverage under formal pension systems is generally low, and the absence of social
safety nets for the needy elderly poses risks in the face of breaks in the economic growth path. In
addition to common systemic challenges, formal old-age income support systems confront issues
specific to their design type: (i) The national provident fund and social security-style systems with reserve
funds have demonstrated problems with investment policy and performance, governance and
management. (ii) In the established market economies, social security-type systems are fiscally
unsustainable in the long run and often have a weak benefit-contribution link. (iii) These types of systems
encounter additional problems in transition economies, including low contribution collection from
previously socialized enterprises and rising benefit take-up, partly as a consequence of the policy
response to labor market disequilibria. Despite the formidable reform agenda, countries have abundant
opportunities to address these issues, and the low level of coverage, predominance of retirement
schemes still in evolution and existence of funded provisions in many countries provide an environment
conducive to reform. Options involve (i) avoiding mistakes (adopting an integrated view on retirement
income provision, balancing individual equity and social equity with efficiency considerations, averting
fiscal unsustainability and integrating public and private sector pensions); (ii) being innovative (moving
toward a multipillar structure, prudently extending coverage, trying new approaches to reduce
administrative costs and extending social risk management through informal support and safety nets);
and (iii) fostering financial markets (decentralizing pension fund management; reviewing governance,
regulation and supervision; and creating or supporting the provision of new instruments).
The Swedish Pension Reform Model: Framework and Issues
Social Protection Discussion Paper No. 0012; Publication Date: 2000/06
by Edward Palmer
This paper describes the recent Swedish reform and available options on major issues within this reform
framework. In June 1994, Sweden's Parliament passed legislation replacing the old defined benefit
system with a combination of a pay-as-you-go notional defined contribution (NDC) and a DC privately
managed financial account scheme, based on a total contribution rate of 18.5 percent on earnings. The
financial account scheme is run using a state-clearing house as a broker, and will have a state monopoly
supplier of annuities. During the accumulation period, participants can choose among all registered

funds, about 500 when they make their first choice in the autumn of 2000. Accounts were created in
1999, and two annual statements have been sent out since then. If the NDC and financial account
schemes together do not reach a minimum level by age 65, and the individual chooses to retire at this
age, benefits from these systems will be supplemented up to the guarantee level, determined by
Parliament and financed with a state budget transfer. This reflects the fact that the PAYG NDC and
financial account schemes are designed to function autonomously from social policy. Life expectancy is
factored into the NDC annuity, and together with the financial account system, this innovation helps to
shift the risk of an aging society onto workers while they are still active. There is no maximum retirement
age, and the system offers a broad range of options for labor-force exit for older workers. Full, partial or
no earnings from work can be combined freely with full or partial annuities from one or both of the public
schemes from the minimum pension age of 61.
Can Investments in Emerging Markets Help to Solve the Aging Problem?
Social Protection Discussion Paper No. 0010; Publication Date: 2000/05
by Robert Holzmann
Prefunding of pension commitments in OECD economies is increasingly seen as a central strategy to
cope with the aging of their populations. This paper argues that investments in emerging markets can
help at the margin but are unable to solve the demographic problem. While these investments bring
potential advantages through enhanced risk diversification, higher rates of return, and accelerated
financial market development, the total effects are likely to be limited. Furthermore, in order to harvest
them, capital sending and receiving countries must fulfill various politically and economically challenging
requirements. For pension policy, the limited contribution of pre-funding at home and abroad in order to
address the demographic problem implies that enhanced emphasis must be given to domestic reforms.
International Patterns of Pension Provision (684kb pdf)
Social Protection Discussion Paper No. 0009; Publication Date: 2000/04
by Robert Palacios and Montserrat Pallares-Miralles
Cross country data on public and private pension schemes are presented and explained. Relevant World
Bank demographic projections and other indicators previously reported in "Averting the Old Age Crisis"
are updated. Relationships between key indicators are highlighted.
Regulation of Withdrawals in Individual Account Systems
Social Protection Discussion Paper No. 0008; Publication Date: 2000/01
by Jan Walliser
Funded mandatory pension systems based on individual accounts are spreading around the world. With
the maturation of those systems, regulating the withdrawal of retirement savings will become increasingly
important. Government regulation of withdrawals should mandate the purchase of inflation-indexed life
annuities exceeding income available from government welfare programs for the retiree and potential
survivors. However, proper functioning of insurance markets does not require annuitizing the entire
account balance. Instead, more flexibility for the choice of withdrawals could be permitted for any
remaining funds, helping to tailor income streams to individual needs and living arrangements.rms of the
existing unfunded programme with greater emphasis on funding the 'insurance' element of the pension
plan.
Pension Reform, Financial Literacy and Public Information: A Case Study of the United Kingdom
Social Protection Discussion Paper No. 0004; Publication Date: 2000/01
by Edward Whitehouse
The project on public information and pension reform will explore these issues by examining a range of
countries' experience. This, the first paper in the series, looks at the experience of the United Kingdom. A
number of interesting initiatives to improve general and individual pension information are described and
assessed.
Managing Public Pension Reserves Part I: Evidence from the International Experience
Social Protection Discussion Paper No. 0003; Publication Date: 2000/01
by Augusto Iglesias and Robert J. Palacios

Many pension schemes mandated by governments have accumulated large reserves. The management
of these funds has a direct effect on financial sustainability and potential benefit levels. It also has
important indirect effects on the overall economy when the funds are large. Part I of this study surveys
some of the available cross-country evidence on publicly-managed pension reserves. We find that
publicly-managed pension funds (i) are often used to achieve objectives other than providing pensions (ii)
are difficult to insulate from political interference and (iii) tend to earn poor rates of return relative to
relevant indices. These findings are consistent across countries of all types, but returns are especially
dismal in countries with poor governance. The experience to date suggests that the rationale for
prefunding have been seriously undermined by public management of pension reserves. Countries with
serious governance problems should probably avoid funding altogether.
Extending Coverage in Multi-pillar Pension Systems: Constraints and Hypotheses, Preliminary
Evidence and Future Research Agenda
Social Protection Discussion Paper No. 0002; Publication Date: 2000/01
by Robert Holzmann, Truman Packard and Jose Cuesta
The paper provides a set of preliminary hypotheses and exploratory econometric testing to explain low
rates of participation in reformed social security systems, with special emphasis on two Latin American
countries. The hypotheses claim that the working poor and self-employed continue to have a specific and
strong rationale for avoiding participation in the multi-pillar pension system and that transactions costs,
system design issues, and problems of credibility negatively influence the decision of all members of the
labor force to participate. Some of the established hypotheses have been subjected to exploratory
econometric testing using available household survey data for Chile and Argentina. The results support
the conjecture that socioeconomic characteristics matter for (non) participation, and that the poor, the
uneducated and the self-employed pose a special challenge to the extension of pensions coverage. The
paper outlines a research strategy, including a more social security-focussed survey and comparative
analyses, to confirm the results presented in this paper, and to test those hypotheses related to the
different pensions institutions reforming governments have chosen to put in place. Work in this vein has
already begun.
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1999
Improving the Regulation and Supervision of Pension Funds: Are There Lessons from the Banking
Sector?
Social Protection Discussion Paper No. 9929; Publication Date: 1999/12
by Roberto Rocha, Richard Hinz and Joaquin Gutierrez
The increasing role of private funded systems in the provision of retirement income has led to an
increasing interest in the analysis of regulatory and supervisory frameworks of the pension industry. This
paper reviews the regulatory framework for pensions and examines whether there is scope for
improvements in regulation and supervision. In carrying out this analysis, the paper also reviews briefly
the regulatory framework for banks and asks whether there are lessons from bank regulation to pension
regulation. Possible lessons from the banking industry arise in the area of guarantees, portfolio
diversification, and the structure of supervision. Many countries have considered the introduction of
guarantees to deal with market risk. The paper argues that multi-pillar constructions already reduce the
workers' exposure to market risk, and that further efforts to reduce this risk should be very cautiously
considered. Within the possible solutions to deal with market risk, the paper favors deferrals of pensions
and different packages of annuities over guarantees. The paper also argues that pension supervision
should examine the trends in bank supervision, which has been shifting from a basic inspection of
compliance to a more general assessment of the quality of corporate governance in banks, and a more
even distribution of responsibility among different market players, including boards, shareholders, and
external auditors.
Notional Accounts as a Pension Reform Strategy: An Evaluation
Social Protection Discussion Paper No. 9928; Publication Date: 1999/12
by Richard Disney

The paper surveys and evaluates Notional Account-type pension reforms (sometimes known as Notional
Defined Contribution plans, or NDCs). The distinguishing feature of such reforms is that a structure of
individual accounts is established, to which contributions notionally accrue. No fund as such is
established and the implicit 'return' on such accounts is determined by a formula linked to some
underlying index of real wage bill growth. Notional Account (NA)-type reforms are described in a number
of countries: in Italy, Latvia, Sweden and Poland. Notional Accounts are, in effect, identical to a welldesigned defined benefit PAYG scheme with reasonable actuarial adjustments and a revalued lifetime
earnings basis to pension benefits. The paper argues that, when examined on grounds of 'actuarial
fairness', macroeconomic sustainability and microeconomic incentives, a reform strategy that introduces
Notional Accounts as the centrepiece of the package is inferior to a strategy that combines 'parametric'
reforms of the existing unfunded programme with greater emphasis on funding the 'insurance' element of
the pension plan.
Reform Options for Pay-As-You-Go Public Pension Systems
Social Protection Discussion Paper No. 9927; Publication Date: 1999/12
by Sheetal K. Chand and Albert Jaeger
The recent history of traditional public pension schemes is one of continuous readjustment of benefit
formulas, retirement ages and other parameters. This paper reviews the basic relationships that
determine the fiscal sustainability of public pension schemes, the challenges of maturation and aging
populations when schemes are finance on a pay-as-you-go basis and the options available to
policymakers short of systemic reform.
Pension Plans and Retirement Incentives
Social Protection Discussion Paper No. 9924; Publication Date: 1999/08
by Richard Disney and Edward Whitehouse
The value of defined-contribution pensions, where the benefit depends on contributions and investment
returns, shows a very different pattern with age of retirement from defined-benefit pensions. DB
schemes, which are the norm in most public and much private provision around the world, provide an
incentive to retire at the earliest possible age. DC schemes, in contrast, encourage people to remain in
the labor force. The paper also assesses the features of DB plans which provide the greatest disincentive
to continued employment at older ages, such as their accural structure with age and formulae based on
final rather than average earnings. Reforms to DB systems, such as pension increments for later
retirement, are examined. But the incentives are not as powerful as those in a DC plan.
Shaping Pension Reform in Poland: Security Through Diversity
Social Protection Discussion Paper No. 9923; Publication Date: 1999/08
by Agnieszka Chlon, Marek Gra and Michal Rutkowski
All over the world, pension systems have financing difficulties that need to be addressed. There are three
ways of dealing with pension systems problems finance it to a greater extent from general revenues,
rationalise the system, which produces savings in the short run, or a full-fledged reform, changing the
logic and foundations of the system. After several years of political and professional discussions, Poland
decided to follow the latter path and introduced a new defined contribution mulitipillar system, consisting
of a public Notional Defined Contribution, pay-as-you-go first pillar, a funded private second pillar, and
voluntary funded third pillar. The new framework covers only retirement savings, while other benefits still
remain under the old defined-benefit pay-as-you-go regime. The reform was launched on January 1,
1999. As of this date, the old defined benefit pay-as-you-go system was terminated for workers younger
than 50. The new old-age system attempts to offer actuarially fair benefits, potentially creating incentives
to increase compliance and postpone retirement. Minimum benefit provision for those who fall below the
guaranteed level is co-financed from general revenue. Diversification of retirement savings provides
greater security to the members, as labour market developments that determine the notional rate of
return in the first pillar, and financial market developments that determine the second pillar rate of return
are not perfectly correlated. This is why the reform package has been named Security through Diversity.
This paper presents the current situation of the pension system, the struggle for pension reform in the
1990s, structure, the long-term outlook of the new pension system and the main aspects of the system
design as well as first experiences from the implementation process. Long-term projections show that the
new system allows for greater financial stability of the public pension scheme and increases the savings
rate with a positive impact on economic growth.

Latvian Pension Reform

Social Protection Discussion Paper No. 9922; Publication Date: 1999/08
by Louise Fox and Edward Palmer
In 1995, Latvia became the first country in Central and Eastern Europe to implement parametric reform of
the Soviet-style PAYGO pension system, and the first in the world to implement the "notional defined
contribution system" originally designed for Sweden. The Government's intention was to follow the
overhaul of the PAYGO system with the creation of a funded second tier by 1998, but the reform has
lagged. Public acceptance of the new system has been poor, and pressures for rollback of the reforms
have grown. After such a splashy beginning why did the Latvian reform stall? What has been the net
effect of the reforms after the roll backs? How did Latvia balance the difficult issues of system incentives,
fairness (within and across generations) and affordability? What are the lessons of the Latvian
experience with the NDC system for other reforming countries? These questions are the subject of this
paper. It includes a description of pre-reform situation, describes the key provisions of the original reform
and discusses the subsequent amendments. The impact of the reform is assessed on the basis of
macroeconomic and microeconomic simulations. On the basis of those, the reforms are evaluated and
conclusions for other countries are drawn.
OECD Public Pension Programmes in Crisis: An Evaluation of the Reform Options
Social Protection Discussion Paper No. 9921; Publication Date: 1999/08
by Richard Disney
Public pension programmes in OECD countries are in difficulties. With ageing populations, and declining
participation of working age men in paid work, existing pension arrangements are likely to be
unsustainable in the future in many of the richer OECD countries. Indeed, supporting existing pension
commitments, even before the 'baby boom' generation reaches retirement, has already proved
problematic in countries such as Italy. Some governments have already taken steps to tackle the pension
issue but there is inevitably conflict over who will bear the burden of retrenchment: will it be current
taxpayers, current pensioners, or future generations of taxpayers and pensioners, perhaps not yet born?
This paper considers several issues. It examines the evidence as to whether public pension programmes
in some richer OECD countries are indeed in need of major surgery, focusing in particular on the issue of
fiscal sustainability. It then considers why programmes have got into financial difficulties. Consideration of
this issue provides some clues as to what type of reform process is likely to be viable and credible. The
paper then examines the strengths and weaknesses of some reform strategies. A central issue
considered there is whether pension programmes should be funded or unfunded.
The Pension System in Singapore
Social Protection Discussion Paper No. 9919; Publication Date: 1999/08
by Mukul G. Asher
Singapore's formal pension system includes several elements including a non-contributory public
employees scheme and social assistance for the elderly. The main source of mandatory retirement
savings however, is the Central Provident Fund or CPF which also includes a variety of other forced
savings programs covering housing, medical savings and other social objectives. This paper focuses on
the defined contribution scheme whose role it is to provide income during retirement. Despite a high level
of service and efficiency, the CPF has historically generated low returns to individuals under a centralized
and opaque investment regime. This threatens to leave many old persons in Singapore with insufficient
savings when they retire. Recent initiatives to allow contracting out of the investment with unit trusts and
liberalization of investment rules may eventually provide the risk-return combination required for a funded
pension scheme. At the same time, a public information campaign and a strengthening of regulations will
help ensure that individuals are able to take advantage of these reforms.
Taking Stock of Pension Reforms Around the World
Social Protection Discussion Paper No. 9917; Publication Date: 1999/05
by Anita M. Schwarz and Asli Demirguc-Kunt
Systems providing financial security for the old are under increasing strain throughout the world. Over the
next 35 years, the proportion of the world's population that is over 60 will almost double, from 9 percent
to 16 percent. Populations are aging rapidly due to rising life expectancies and declining fertility rates.
This puts added strain on extended families and other traditional ways of supporting the old which are
already weakening under the pressure of urbanization, industrialization, and increased mobility. At the

same time, public systems of old age security are themselves in need of reform. Most existing systems
are very costly even though they provide inadequate protection for the old. The purpose of this paper is
to provide a brief summary and evaluation of recent pension reforms around the world.
The Tax Treatment of Funded Pensions
Social Protection Discussion Paper No. 9910; Publication Date: 1999/04
by Edward Whitehouse
Pension funds are an important part of private savings flows, the main supplier of capital to industry and
play a large and growing role in providing retirement incomes in countries with mature funded pension
systems. Reforms which increase the emphasis on privately managed, funded pensions must get the tax
treatment right. This paper sets out the options for taxing pensions, and the arguments between them.
The tax treatment in 35 different countries is described and summarized in an empirical measure: the
marginal effective tax rate. Other data assess the importance of pension funds and tax incentives in
aggregate, drawing on national and international sources.
Collecting and Transferring Pension Contributions
Social Protection Discussion Paper No. 9907; Publication Date: 1999/02
by Gustavo Demarco and Rafael Rofman
Collecting social security contributions is an important operational issue in all types of pension system.
Many regimes are plagued by poor compliance and weak, inefficient administration. Some countries
have tried to introduce an automatic incentive to contribute by moving systems closer to 'actuarial
fairness,' where pension benefits are more strictly related to individual contributions. Examples include
the systems of individual accounts introduced in a range of countries in Latin America and Eastern
Europe. But in these regimes, collecting and transferring contributions is a more complex process. This
paper considers different aspects of the process of collecting pension contributions.
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1998
Supervising Mandatory Funded Pension Systems: Issues and Challenges (180kb pdf)
Social Protection Discussion Paper No. 9817; Publication Date: 1998/12
by Gustavo Demarco and Rafael Rofman
The regulation and supervision of pension funds is a critical part of building public confidence in a
funded-pension system. This paper argues that confidence is best bolstered by an independent,
autonomous and transparent supervision agency, particularly when previous systems had failed. The
choice between proactive and reactive supervision depends on previous experience of self-regulation in
a country's financial sector. The paper examines four key areas of supervision in detail: institutional,
financial, membership and benefits control. It looks at collection of contributions, asset valuation, portfolio
limits, custodianship and benefit guarantees. New data are presented on the performance of supervision
agencies in and on marketing and operation costs of new pension funds in Latin America. Comparative
data for OECD countries is also included.
Social Protection Discussion Paper No. 9815 - This paper has been revised, please see No. 9923
The Role of Choice in the Transition to a Funded Pension System
Social Protection Discussion Paper No. 9812; Publication Date: 1998/09
by Robert Palacios and Edward Whitehouse
A critical question in the transition to a funded, private pension system is whether the new private
element is presented as a mandate or choice to current and future workers. This paper sets out the
spectrum of available options and looks at policy in 13 reforming countries. It concludes that older
workers are best excluded from reform, because the economic benefits are small and the political
resistance is likely to be large if they are included. However, a defined cut-off age is arbitrary for reasons
of intergenerational equity and heterogeneity of portfolio composition and risk preferences within cohorts.
A voluntary switch is preferred. The main objection is the resulting uncertainty over the numbers

switching. Analysis of reforming countries shows however, a consistent and rational pattern of switching.
The paper concludes by discussing policy options for managing the switching process.
Pension Reform in Britain
Social Protection Discussion Paper No. 9810; Publication Date: 1998/06
by Edward Whitehouse
This paper examines the evolution of the pension system in Britain. In particular, it focuses on the shift
from pay-as-you-go, state-run defined-benefit pensions to individual, private-sector, funded definedcontribution accounts. It looks at three issues in this reform: the financing of the transition from pay-asyou-go to funded provision; the fiscal impact of voluntary switching and adverse selection; and the
question of the degree to which personal pension accounts were 'over-sold' to individuals for whom they
were not suitable. The paper examines recent reform proposals and the prospects for reform under the
New Labour government elected last year. It concludes that the British system has avoided a future
financial crisis arising from the demographic transition, but that problems of incentives and retirementincome adequacy remain.
Financing the Transition to Multipillar
Social Protection Discussion Paper No. 9809; Publication Date: 1998/12
by Robert Holzmann
The shift from a PAYG pension scheme to one which is fully funded ends the process of rolling over the
unreported pension debt with each new generation. To the extent that current pensioners and workers
have amassed pension rights in the old PAYG scheme, the government will be forced to borrow or tax in
order to meet this obligation, which is often larger than the conventionally defined public debt. This paper
focuses on assessing the size of the initial debt that will be made explicit, reducing it through policy
measures and financing the transition through a combination of debt and tax financing. Producing such a
strategy is a key challenge to pension refromers and crucial in determining the success or failure of this
type of reform.
The World Bank Approach to Pension Reform (178kb pdf)
Also available in French (76kb pdf)
Social Protection Discussion Paper No. 9807; Publication Date: 1999/12
by Robert Holzmann
The paper highlights the World Bank's thinking and worldwide involvement in pension reform. Both are
driven by the Bank's mandate to help countries develop economically and to reduce poverty. The Bank
has four key concerns in working with clients on pension policy: (1) short-term financing and long-term
financial viability; (2) effects on economic growth; (3) adequacy and other distributive issues; and (4)
political risk and sustainability. In response to these concerns and after review of the three main reform
options for unfunded systems - mere PAYG reform, a rapid and complete shift to a mandatory funded
system, and a gradual shift to a multi-pillar scheme - the Bank clearly favors the multi-pillar approach but
in a pragmatic and country-specific manner. When helping to implement a pension reform the Bank fully
takes account of country preferences and circumstances, bases its support on sound reform criteria, links
the client assistance with knowledge management, provides training and other measures to enhance the
reform capacity of a country, and seeks cooperation with other international institutions. In addition, the
Bank has a comprehensive research agenda to improve the working of multi-pillar schemes, and the
investigations include issues of coverage, administrative costs and annuities.
Government Guarantees on Pension Fund Returns
Social Protection Discussion Paper No. 9806; Publication Date: 1998/04
by George Pennacchi
This essay reviews defined contribution pension return guarantees typically made by governments in
connection with pension privatizations. Finance theory related to the pricing of options provides a unifying
framework for evaluating the cost of these guarantees. The essay considers two types of guarantees on
the rate of return earned by an individual pension fund: a guarantee of a fixed minimum rate of return;
and a guarantee of a minimum rate of return that is set relative to the performance of other pension
funds. A minimum pension benefit guarantee for a participant in a mandatory defined contribution
pension plan is also discussed. Costs for each of these guarantees are illustrated using typical parameter
values.

The Hungarian Pension System in Transition

Social Protection Discussion Paper No. 9805; Publication Date: 1998/04
by Robert Palacios and Roberto Rocha
After discussing the evolution of the policy dialogue in Hungary, the paper broadly describes the reform of
the pay-as-you-go public pension system and its partial privatization as legislated in July 1997. Through a
combination of a debt and tax financed transition, the first partial pension privatization in Central Europe
is shown to generate increased national savings while placing the pension system on a more sustainable
course. The potential positive impact on savings was diminished by politically-motivated compromises.
Outstanding issues include problematic features of the "second pillar" and the reemergence of pay-asyou-go deficits in the long run. This suggests that further reforms, such as raising the retirement age
beyond 62, will eventually be required.
Risks in Pensions and Annuities: Efficient Designs
Social Protection Discussion Paper No. 9804; Publication Date: 1998/02
by Salvador Valdes-Prieto
This paper considers alternatives to disperse the accumulated pension rights during the liquidation phase
or retirement. First, the paper classifies the risks that affect pensioners, discusses the defined benefit and
defined contribution options, and classifies pension contracts according to the type of risk they transfer to
the worker. It considers fixed annuities, variable annuities, CREF annuities, and programmed
withdrawals. This part is a description of the production function for pensions and annuities. Second, the
paper offers a discussion of the restrictions that should be imposed by mandatory pension systems on
the menu of pension contracts. One section discusses whether lump sum withdrawals should be allowed
and the other discusses if there should be a mandate to annuitize wealth. The argument that the
annuitization should be mandated to prevent adverse selection is rejected on the basis of Chilean
evidence.
Building an Environment for Pension Reform in Developing Countries
Social Protection Discussion Paper No. 9803; Publication Date: 1998/01
by Olivia S. Mitchell
Fiscal problems are prompting many developing nations to amend and sometimes restructure their
national old-age programs. As they do so, these countries seek guidance on how to design market and
regulatory structures to enhance their chances of success. This paper investigates the types of risks
facing participants in retirement systems, and examines which financial, regulatory, and labor market
institutions appear most supportive of retirement system reforms, and most urgently needed, in
developing countries.
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A city in crisis. Thats how one research group describes Rockford because of its pension
problems. It gives the city a critical rating, and warns taxpayers arent the only ones feeling
the impact.
A lot of attention is being put on Chicago because Chicago is the super dangerous pension
system in the state, but theyre pretty much ignoring whats happening in the municipal
level, said Ted Dabrowski with the Illinois Policy Institute.

Whats happening in Rockford, according to Dabrowski, is the pension system is failing.

Most taxpayers dont understand just how bad things are. Im not sure that city workers
understand just how badly funded their pensions are, he said.
His report show the citys police and fire pensions have only 60 cents for every dollar
promised for their retirement. It also shows taxpayers are paying more than ever.
Over the last 10 years, taxpayers contribution to that system have almost doubled, said
Dabrowski. And surprisingly despite all that new money thats going from taxpayers from
the budget into pensions, the pension systems are not doing that much better.
Dabrowski says the city is also paying more. The cost of that means less money for
infrastructure, roads and jobs.
Weve had to lay off employees. Weve been down in terms of the number of police officers,
we made reductions in our fire staffing, said Rockford Mayor Larry Morrissey.
Morrissey says state pension reform was a start, but Rockford needs more help.
Local police funds, local fire pension funds were untouched. Those are the ones that were
asking the state to address. And if they can address those, we can get a handle on our
unfunded liability and be in much stronger fiscal health, said Morrissey.
But State Senator Dave Syverson says its the local government that needs to get a handle on
the situation.
The state could come in and try to force a change on local governments. But thats really
more of a last resort because its not our job to come in and force something on a local
community and be the bully, said Syverson.
Mayor Morrissey disagrees.
The issue is a state government issue, we dont set the benefits levels, he said.
Syverson says the state will work with municipalities but state lawmakers cant do all the
heavy lifting.
What would be a better solution is if both sides would sit down look at the problem and
try to come up with a reasonable solution that both could agree with and then come to the
state and say heres a solution that we have. Can you help pass this? said Syverson.

We contacted State Senator Steve Stadelmans office to weigh in on this issue. He did not
return our calls.