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Beefed Up Pensions?

Aging is a global phenomenon. Though having occupied a prominent role on the agenda in industrialized countries for some time, it is often overlooked that in a few decades, the majority of the world's older populations will live in developing countries.

Providing income security to older persons in aging societies is a challenge perceived very differently in industrialized and developing countries. In the former, the debate has mostly been about how to make public pension programs financially sustainable in the long term. In the latter, efforts have focused on creating some form of even basic protection for older persons.

It is often assumed that countries throughout the world have established comprehensive retirement income programs to fight poverty among the elderly. The real situation is, however, very different. The vast majority of the world's population is either without or has only inadequate access to social security protection. In most countries, the creation and extension of social security programs must therefore have absolute priority. This is not only a moral obligation. It is also an economic necessity. A recent study of the International Social Security Association (ISSA) has for instance shown that social security provides the foundation for social development, which is indispensable for economic development and steady economic growth.

But coverage is not only an issue for developing countries. The coverage gap has widened in industrialized countries too. Globally, the growth in atypical employment and the mushrooming of the informal economy are major factors accountable for this development.

Bridging the coverage gap is a major concern for the ISSA. We are constantly working with policymakers and social security institutions around the world in order to reduce, as rapidly and as extensively as possible, the number of older persons living without an adequate income.

Where more or less mature social security systems exist, recent reforms have focused on ensuring that these systems will be financially sustainable in the long run. Discussions have been mostly concerned with contribution rates, funding levels, benefit formulas and whether retirement income should be provided by one, two or even more pillars of old-age security. Countries have curtailed benefits, encouraged or mandated complementary privately managed schemes, and have put more and more responsibility on the shoulders of individuals.

Positively, many of these reforms have proven that social security can adapt to changing social and economic circumstances, and that scenarios of financially unsustainable or bankrupt    

                                                       

schemes are overly simplistic and unfounded. Negatively, reforms in some countries have substantially decreased the level of protection provided to individuals and have exposed individuals to considerable financial and other risks.

After more than a decade of pension reform, it is now becoming increasingly clear that adequacy of pension benefits has been neglected in the pursuit of financial sustainability. Predictions of income replacement rates of retirement income systems in industrialized countries clearly show that pension schemes will, in many cases, not provide an adequate retirement income to retirees, and we may thus be facing the challenge of avoiding a steep increase in poverty among older people in the future.

We have reached a point where it is essential to move the debate beyond the narrow view on the technical parameters of pension schemes. A wider consideration is needed of the social and economic factors influencing whether we will be able to build financially sustainable and adequate pension schemes for the future. The basic challenge of a shrinking working population having to support a growing number of economically inactive persons is well documented. In order to cope with this challenge, however, social policies must shift from reactively rewarding inactivity to proactively encouraging activity. Policymakers around the world are now realizing that employment and labor force participation carry the key to financing adequate pension benefits in the future. Action to promote employment and enhance labor market opportunities is needed in several fields. For instance, further efforts must be made to reverse the trend to early retirement that is endemic, especially in a number of European countries. In addition, policies to increase the labor force participation of women are an important factor in promoting employment.

It is crucial that such measures abolish existing barriers to labor force participation and create positive incentives and opportunities. Negative incentives, such as actuarial benefit reductions for older workers retiring early, have not been successful in increasing labor force participation rates. However, positive measures, such as combating age discrimination, educating employers on the specific skills and high productivity of older workers and support for creating workplaces that take into account specific needs of older workers, have significantly more potential.

A proactive social policy that gives individuals the opportunity to combine work and family through a network of childcare services and that supports a family friendly work environment has, in some countries, proven to have a significant impact on labor force participation and over the longer term, improving pension financing.

Dalmer Hoskins serves as Secretary General of the International Social Security Association (ISSA).

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