## Going Broke? Why Pension Reforms Are Needed in Emerging Economies

_IMF Blog, April 6, 2012_

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## Bibliographic details
- Authors: Mauricio Soto
- Published: April 6, 2012

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### Summary and context
- 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.

### Rising spending and demographic pressure
- 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).

### Coverage gaps and elderly poverty
- 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.

### How pension reform can help (policy options)
- 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.

### Conclusion
- 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.*

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## References

- [pension reform](http://blogs.imf.org/2012/02/01/its-the-years-not-the-mileage-imf-pension-reforms-in-advanced-economies/)
- [https://www.imf.org/wp-content/uploads/2012/04/chart-1.jpg](https://www.imf.org/wp-content/uploads/2012/04/chart-1.jpg)
- [https://www.imf.org/wp-content/uploads/2012/04/slide22.jpg](https://www.imf.org/wp-content/uploads/2012/04/slide22.jpg)
- [short run](http://blogs.imf.org/2011/04/26/better-measuring-pension-reform/)

_Source: https://www.imf.org/en/blogs/articles/2012/04/06/going-broke-why-pension-reforms-are-needed-in-emerging-economies_