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The profound effects of aging populations and a shrinking labor force on overstretched state pension schemes in emerging Europe and Central Asian countries demand significant reforms, says the World Bank’s new report The Inverting Pyramid: Pension Systems Facing Demographic Challenges in Europe and Central Asia.
If bold pension reforms are not made, it will be today’s young and the elderly poor who will suffer the most from the inability of state pension systems to ensure basic income protection in old-age. Failing to act today raises equity concerns for the next generation as it would likely result in future pension benefits cuts and these would hurt the poor more than the rich, according to the report.
The report, launched on February 21 in Brussels at a conference hosted by the European Commission and the World Bank, finds that most pension systems have already reached “maturity,” with little possibility to expand the number of contributors due to a stagnant and declining working-age population. The declining working-age population is causing the traditional population pyramid – with a few elderly at the top and larger numbers of working-age populations at the bottom – to invert, with smaller working-age populations now at the bottom and larger numbers of pensioners toward the top.
“The countries of emerging Europe and Central Asia have been some of the most active reformers in the world, adopting a number of new pension designs, such as point systems in Serbia and Croatia, notional accounts in Latvia and Poland, universal benefits in Georgia, Kazakhstan, and Kosovo, and individual savings accounts in Estonia, Romania, F.Y.R. Macedonia, and the Russian Federation,” said World Bank Vice President for Europe and Central Asia, Laura Tuck. “However, many of these reforms have not been sufficient for pension systems to sustain adequate benefit levels in the face of deep demographic changes. Moreover, some of these reforms have been reversed in the face of short-term fiscal pressures.”
The report states that transition countries of Europe and Central Asia, including Turkey, have made big efforts in the past 20 years to reform their pension systems in order to align them with the new social and economic realities of market economies. However, with the high economic growth of the mid-2000s, some countries increased the generosity of pension benefits in light of their higher revenues. The financial crisis left these countries with reduced revenues and higher pension benefits, which led to pension reforms reversals. For instance, some countries undid the individual savings accounts to help fill their revenue shortfalls, but at the risk of further compromising the sustainability and adequacy of pensions in the long run.
The report examines two potential solutions to face the demographic challenges to pension systems: 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 labor, leaving them little scope for generating additional revenue to address pension deficits. Moving away from labor taxation as the financing source for old-age security and toward consumption and property taxes might help generate some additional revenue, but even there the scope is limited in most countries.
Raising retirement ages and encouraging and supporting individuals to work longer would go a long way toward enabling pension systems to provide for basic old-age income and be more financially sustainable. Measures to encourage older workers to continue working include:
- providing options for gradual retirement, for example, by allowing older people to work part-time while collecting a partial pension;
- adopting small adjustments to the workplace, such as putting magnification on computer screens and providing ergonomic chairs, to raise the overall productivity and comfort level of older workers; and
- investing more effectively in training at older ages by rethinking adult education, training, and lifelong learning systems to make them a better fit for aging brains.