Unions urge World Bank: Stop pushing private pensions!

Focus on Public Services

September 2003

A delegation of twenty-five trade union representatives and advisors, headed by the International Confederation of Free Trade Unions (ICFTU) Assistant General Secretary, José Olìvio Oliveira, met with the World Bank on 21-22 May to express criticism and recommend changes in the Bank’s pension reform policies. The delegation’s position was strengthened by the timely release of an ICFTU report on pension reform in Latin America and Central and Eastern Europe.

The World Bank has been particularly active in designing and financing reforms to pensions systems that involve scaling down public schemes and diverting contributions into privatized pension funds. 

For the past decade, the Bank has promoted private pension plans – in which part or all of an existing plan’s pension money is channeled to capital markets – at the expense of the traditional pay-as-you-go plans, often financed by an employer pay-roll tax or by paycheck deductions. More than a dozen countries in Latin America and Central and Eastern Europe have partially or completely replaced public pension systems with funded systems managed by private financial institutions, mostly European or North American.

The Bank has been a major power behind this shift, providing loans and technical support and sometimes tying credit to acceptance of the change. It argues that privatizing pensions injects workers’ savings into national economies, boosting the capital market, making funds available for local enterprises and creating jobs.

Now, unions want the Bank to stop pushing private pension plans on millions of workers worldwide because the schemes do not deliver what they promise.

Although the World Bank’s pension reform programs over the past several years have concentrated on the developing and transition countries, more recently the Washington-based institution has decided to weigh in on the debate about pension systems taking place in several countries of the European Union. In May, the Bank published a 200-page book entitled Pension Reform in Europe, which paints a somber picture of Europe-an pension systems and asserts that countries in Western Europe have no choice but carry out massive reforms involving increased retirement ages, reduced benefits and partial privatization. 

The wisdom of such recommendations, however, is aggressively contested in the ICFTU’s 60-page report on World Bank Involvement in the Privatization of Public Pension Systems in Developing and Transition Countries, which points to the risks of extremely high administration costs of privatized (or funded) pension plans, the lower benefits to retirees, particularly women, under Bank-backed reforms, and the fact that most reforms have been intentionally designed to cover fewer retirees, leaving large numbers without any protection.

“Funded plans also tend to be less favorable to women”, according to the ICFTU report, “The payments from some funded plans are based on gender-specific life expectancies. A woman who retires at a particular age will get smaller benefit than a man retiring at the same age with an identical accumulation because she has a longer life expectancy”. The traditional pay-as-you-go plans, however, are generally redistributive, and therefore tend to reduce this inequality. 

“The shift to funded plans means that women will no longer benefit from the redistributive aspect of the previous programs”. 

The report also argues that privatization in transition countries such as Poland or Hungary was pushed through unnecessarily. According to the report, “the immediate crisis was due more to the displacement created by transition, than the inherent flaws in the [public] pension system”. 

The ICFTU argues that the Bank’s plans are based on the “false notions that private is always better than public” and that the market is “somehow more secure than inter-generational solidarity”. The evidence gathered proves otherwise in countries like Argentina, Chile, Kazakhstan and Latvia. According to the report, “The transition from public to partially or wholly privatized plans has posed enormous fiscal strains on governments, sometimes with disastrous consequences, most dramatically in the case of Argentina”. 

“These things tend to be subject to all kinds of abuse by all sorts of fly-by-night operators unless it’s very well regulated and very well supervised”, said Peter Bakvis, Director of the Global Union’s Washington office, after the meeting. Interviewed by Emad Mekay from Inter Press Service, Bakvis said that “private brokers siphon money off pensions, with exorbitant administration fees, for example, which are often levied as a percentage of a transaction’s value. That’s one of the major problems. It’s hard enough to supervise in Canada or Europe, let alone in developing countries. In countries that don’t have a strong regulatory regime or a lot of expertise in this, people tend to get away with murder”. 

In view of the policy failures, the union delegation recommended that, instead of dogmatically pushing costly pension privatizations, the Bank should offer to use its considerable expertise and financial resources in assisting countries to improve their existing programs. Bank officials acknowledged the fears and promised to act on at least some of the advice, cautioning that they are unsure if that will lead to changes on the ground.

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