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02

Call for pensions overhaul in Eastern Europe and Central Asia

Open-access content Friday 21st February 2014 — updated 1.13pm, Tuesday 5th May 2020

Bold public sector pension reforms are needed in emerging European and Central Asian countries to tackle the increasing pressures from the region's ageing population and shrinking labour force, the World Bank said today.

Launching a report in Brussels on the demographic challenges facing pension systems, the bank said the region should begin a debate on acceptable long-term and socially sustainable reforms to ensure pension benefits that protect the elderly poor and future generations.

A key factor in this should be a rethink of the social norms around retirement age, the Inverting pyramid report said.

Speaking at the launch of the report, Ana Revenga, the bank's vice president on poverty reduction and economic management, said increases in life expectancy, sharp decline in fertility, and increasing emigration has all helped compromise the affordability of many pension systems. Also, fiscal pressures had led countries to increasingly limit their already-overstretched pension spending by fostering private pension provision and individual long-term savings plans.

The report sets out a variety of options to ease the pressure on the region's pension systems. A long-term solution lies in adjusting the generosity of pension systems so that retirement income covers only the period when individuals can no longer work, typically the last 15-years of life, stated the report.

Raising retirement ages and encouraging and supporting individuals to work longer would also go a long way toward enabling pension systems to provide for basic old-age income and be more financially sustainable.

Measures such as auto-enrolment can induce workers to fill any retirement income gaps with their own savings, the report pointed out.

It also examined two potential short-term solutions: generating additional fiscal revenue to cover pension deficits, and increasing the number of contributors to the system.

However, countries in the region tend to already have high tax burdens, especially on labour, leaving them little scope for generating additional revenue to address pension deficits, the World Bank said. While moving away from labour taxation as the financing source for old-age security toward consumption and property taxes could help generate some additional revenue, the scope to do this was limited in most countries.

Meanwhile, expanding the base of contributors 'would only ease or delay needed reforms' of pension systems if the relationship between contribution and benefit accrual remains fundamentally flawed, the report said.

'There are no one-size-fits-all solutions,' it concluded. 'Regardless of the path chosen, countries need to begin a social dialogue on what approach [would meet the needs of their aging populations].'


This article appeared in our February 2014 issue of The Actuary.
Click here to view this issue
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