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Pensions for life?
The rise of pensions as a development issue

By: Armando Barrientos
Insights 42, June, 2002

The 1990s could well qualify as the decade of global pension reform. A number of countries in Latin America and some transition economies radically transformed their pension provision and moved swiftly towards privately provided individual retirement plans. Less conspicuous, but no less important, South Africa and Brazil reformed their basic pension plans to achieve almost universal coverage.

The World Bank's 1994 report on 'Averting the old age crisis: policies to protect the old and promote growth' drew attention to population ageing in the developing world, and raised the profile of pensions in the context of development policy. Accelerated population ageing in the South makes old age support a prominent, and pressing, policy issue. Moreover, pension plans can have a significant impact on economic development by raising private saving and improving capital and labour markets.

Demographics and development

Most developing countries have relatively young populations, but this will change rapidly in the first half of this century. A steep fall in fertility rates combined with improvements in life expectancy will produce a rapid demographic transition in developing countries. According to the UN Population Division, the proportion of the population aged 60 and over is expected to double in Africa, and to almost treble in Asia. By the year 2050, older people will account for 10% of the population in Africa, and 23% in Asia and Latin America. In Africa, the impact of HIV/AIDS has further accelerated population ageing proportionally, as shown in Richard Disney's article. The number of people aged 60 and over in the world is predicted to reach 2 billion by 2050, and over 64% of these will be living in Asia.

Accelerated population ageing in the South will produce wide-ranging social and economic changes. These will be far-reaching, but they may not necessarily constitute a crisis as some suggest. Population ageing represents in fact a considerable achievement, and improvements in life expectancy are a key indicator of rising human development. The issue is how to accommodate population ageing, sustain and improve the wellbeing of older people, and strengthen their contribution to economic and social development. What is needed is to shift out of notions of old age as synonymous with dependency and to embrace the challenges of 'active ageing'.

Pensions in the developing world
The issue of how to organise pension provision in the developing world acquired a higher profile with the publication of the World Bank's 1994 report. It recommended that countries adopt multi-pillar pension systems, with a tax-financed safety net pension as the first pillar, contributory work-based pension plans as the second pillar, and voluntary saving as the third. Subsequently, the Bank focused almost exclusively on supporting the introduction of individual retirement saving plans, with Chile's reform as an example of success. This was rationalised in terms of significant economic advantages claimed to arise from these plans, including improved work and saving incentives, the strengthening of capital markets and the reduction of fiscal deficits. Roger Charlton and Roddy McKinnon take a critical stand on the dominance of the Bank's model of pension reform. Pension reform in Latin America and some transition economies has followed closely this model of pension provision. Carmelo Mesa-Lago reviews the evolution of pension reform in Latin America against the impact of the crisis in Argentina

In the spread of pension reform in the 1990s, and the debates that have followed, insufficient attention has been paid to the wide range of pension provision in developing countries. A number of countries in Asia and Africa (e.g. Singapore, Malaysia, India and Zimbabwe) organise old-age support around provident funds. Typically, workers are required to contribute a fraction of their earnings to a provident fund account. The government invests the savings in a range of projects, with a strong development focus, and pays a fixed rate of return to the accounts. A feature of provident funds is that workers are allowed to withdraw part of their savings for specified purposes - normally housing purchases, health expenditure and higher education. Account balances can be withdrawn in full at the specified retirement age. In South Asia, provident funds have helped strengthen intergenerational solidarity and family-based risk management. A contribution by Robert Palacios considers the options for reforming provident funds in India, while Mukul Asher examines the challenges of maturing provident funds in Malaysia and Singapore

The coverage of social insurance pensions, individual retirement savings accounts and provident funds in developing countries is restricted to workers in formal employment. Changes in the labour market in the past two decades have led to a decline in formal employment. The implication is that a majority of the current old, and an even larger proportion of the future old, will not have access to pension entitlements.

Few countries in the developing world provide universal non-contributory pensions, but pension reforms in South Africa and Brazil in the 1990s deserve closer examination. In South Africa, the fall of apartheid led to the demise of racial discrimination in basic state pension entitlements for blacks. The 'social pension' as it is popularly known, provides a regular source of income to older people and their households, and it is proving to be a powerful instrument in poverty reduction and economic development. A contribution by Stephen Devereux draws attention to this important development. In Brazil, the end of dictatorship produced a new 'social contract' crystallising in the 1988 Constitution. This improved and extended pension entitlements to rural communities and to workers in informal employment. Implemented in the early 1990s, the previdencia rural has had a measurable impact on poverty reduction, has ameliorated the worst effects of liberalisation in agriculture on rural households, and led to an improvement in the wellbeing of older people and their households

. A contribution by Helmut Schwarzer and Guilherme Delgado provides a concise assessment of the impact of previdencia rural. The experiences of South Africa and Brazil show that pension reform focused on universalising pension provision can have a measurable impact on the wellbeing of older people, poverty, and economic and social development.

Pensions in development policy
Pensions provide a foundation for old-age support programmes that are needed to accommodate rapid population ageing in the South, and developing countries should give urgent consideration to this issue. Katharina Müller's contribution discusses the political constraints on pension reform in transition economies and Latin America. In the context of development policy, pensions have a broader role:

Well-designed pension plans can 'crowd in' and strengthen other forms of old age support provided by families, employers, NGOs and community organisations.

Pensions can enhance economic and social development by facilitating the already significant contribution older people make to their households, communities and economies.

Pensions can also strengthen intergenerational transfers and solidarity, and spearhead the development of sustainable welfare programmes.

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