Xinmei Wang, John B. Williamson and Mehmet Cansoy
Chinese Academy of Social Sciences, Beijing, China;
Boston College, Chestnut Hill, MA, United States
Abstract:About 40 developing countries have involved in systemic reform that substitutes privately managed funded systems for existing pay-as-you-go public pensions mainly since the mid-1990s. However, about half of them have been either partially or fully terminated. This paper investigates several important characteristics that have been previously largely overlooked. Firstly, the fundamental differences with respect to the dominant approaches of public pension reform between developing and developed countries are described. The major difference has been systemic reform in developing countries vs. parametric reform in developed countries. Secondly, based on the evidence that a substantial proportion of the elderly in developing countries are not protected by any public pension providing what can be considered an adequate minimum standard of living, the inherent key features of systemic reform have turned out to be: triple burden costs during transition period, and the tradeoff of the allocation of government resources between social pensions and mandatory funded pensions. These inherent characteristics have led to the problems of incentive incompatibility, unaffordability of volatilities of capital markets, and low-coverage. We also discuss the difficulties of annuitization in connection with funded defined contribution schemes.
Keywords:systemic pension reform, pay-as-you-go, funded pensions, social pensions, annuitization, transition costs