Going Broke? Why Pension Reforms Are Needed in Emerging Economies

IMF Blog, April 6, 2012

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The IMF analysis shows that across emerging economies pension spending is projected to rise as the population ages.
On average, these spending increases are not that large, but reforms are needed to increase coverage without making pension systems financially unsustainable over the long term.

In emerging Europe, pension spending has increased from 7½ to 9 percent of GDP over the past two decades.
Spending also increased in other emerging economies from 2 to 3 percent of GDP over the same period.
The relatively low spending in emerging economies outside Europe reflects relatively low coverage (generally only those in the formal sector are eligible) and younger populations.
The ratio of elderly to working population will more than double in the next four decades.
Projected increase in pension spending over the next 20 years is about 1 percentage point of GDP, assuming no expansion of coverage beyond current levels.
Several countries—Bulgaria, Chile, Estonia, Hungary, and Poland—have enacted reforms that will cut public pension spending over the next 20 years.
For five emerging market economies the fiscal burden will be a lot higher (more than 2 percentage points of GDP).

Large shares of the elderly population are poor in many emerging economies, in part because of inadequate pension coverage.
Percentage of the elderly who receive public pensions by region:
- Emerging Asia: 26%
- Latin America: 59%
- Emerging Middle East and Africa: 68%
- Emerging Europe: 93%
Expanding existing pension systems to improve coverage would be costly:
- Increasing coverage from 26 to 34 percent in Asia would increase spending by 1 percentage points of GDP.
- Increasing coverage from 64 to 73 percent in other emerging economies outside of Europe would increase spending by 1 percentage point of GDP.

Range of measures to address demographic pressures:
- Raising retirement ages
- Cutting pension benefits
- Increasing revenues
Advantages of gradually raising retirement ages:
- Promote higher employment levels and economic growth
- Help avoid cuts in pensions, reducing the impact of reforms on elder poverty
- May be easier for the public to understand than cutting pensions or increasing contributions
Possible strategies and cautions:
- Equalize retirement ages of men and women where statutory retirement ages of women remain lower than those of men.
- For emerging economies with low pension coverage, reform current systems—which are often generous but cover only a small portion of the population—prior to expanding coverage.
- Countries with very low coverage rates could consider “social pensions” that provide a noncontributory flat pension aimed at poverty reduction.
- In countries with substantial pension coverage (such as in Emerging Europe), continue reforms to contain growth in public pension spending.
- Be cautious in diverting additional contributions from public to private systems, which could make financing of the deficit more challenging in the short run.

Many emerging economies will need to expand their pension systems to reduce poverty among the elderly.
Well-designed reforms can help countries meet this objective without going broke.

Source: Going Broke? Why Pension Reforms Are Needed in Emerging Economies — IMF blog, Mauricio Soto, April 6, 2012.