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The Effectiveness of Multi-Pillar
Pensions– A Precautionary Tale
NASI Conference
Emily S. Andrews
World Bank (retired)
January 20, 2006
1
Conclusions are the author's
Lessons about Multi-Pillar Reforms
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2
Findings from World Bank Report
Why Multi-Pillar Reform?
The Appropriateness of Multi-Pillar Reforms
The Development Impact of Multi-Pillar
Reforms
Lessons for the Future
Conclusions are the author's
Why Multi-Pillar Reform?
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Affordability of PAYG systems given population aging
Better rates of return through private sector
investment
Need for increased savings to bolster economic
growth
Need for capital market development
Need to reduce the impact of (inefficient)
governments
Conclusions are the author's
Initial Conditions for Multi-Pillar
Reforms
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Are initial conditions inappropriate for multipillar reform?
Do countries have macroeconomic stability,
banking sector readiness, moderate
indebtedness, and a low risk for corruption?
Have non-contributory options to expand the
safety net to those outside the formal
pension system been considered?
Conclusions are the author's
Many Countries Had High Inflation at
Reform
FYR Macedonia
Ukraine
Bulgaria
Estonia
Bolivia
Croatia
Dominican Republic
Costa Rica
Argentina
Nicaragua
Poland
Kazakhstan
Hungary
Russia
Romania
Colombia
Mexico
Latvia
Uruguay
Peru
Ecuador
-5
5
15
25
35
45
55
65
75
85
95
Percentage increase in CPI
5
Conclusions are the author's
Poor Financial Sectors Characterize
Some ECA Multi-pillar Reformers
Hungary
Slovak Republic
Estonia
Poland
Croatia
FYR Macedonia
Latvia
Bulgaria
Romania
Ukraine
Kazakhstan
Russia
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
EBRD rating at time of reform
6
Conclusions are the author's
Many Reformers Had Poor Corruption
Index at the Time of Reform
Slovakia
Croatia
Russia
Ukraine
Nicaragua
Ecuador
Kazakhstan
0
7
Costa Rica
Hungary
Poland
Peru
Bulgaria
Argentina
Romania
Dominican
Bolivia
Republic
Mexico
FYR Macedonia
Colombia
El Salvador
Latvia
25
50
75
World Bank I nstitute "Control of Corruption"
percentile (closest year to reform)
100
Conclusions are the author's
Some Multi-pillar Countries Already
Had High Savings Rates
Nicaragua
FYR Macedonia
Bolivia
Bulgaria
Kazakhstan
Dominican
Peru
Republic
Uruguay
Argentina
Romania
Croatia
Colombia
Latvia
Estonia
Poland
Costa Rica
Ukraine
Mexico
Ecuador
Hungary
-15
8
-10
-5
0
5
10
15
20
Percentage of GDP
25
30
Russia
35
40
Conclusions are the author's
The Impact of Multi-Pillar Reforms
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9
Multi-pillar reforms have helped improved fiscal
sustainability, but the improvements are not sufficient
for the long-term
In many countries with multi-pillar systems, funded
pillars were not well-diversified and remained open
to political influence
The secondary objectives of funded plans—to
increase savings, develop capital markets, and
improve labor market flexibility—have remained
largely unrealized
Conclusions are the author's
In LAC, Only Some Funded Pension Portfolios Are
Well-Diversified (percentage of holdings as of
December 2002)
Government
securities
Financial
institutions
Corporate
bonds
Equiti
es
Investment
funds
Foreign
securities
Oth
er
Argenti
na
76.7
2.6
1.1
6.5
1.8
8.9
2.4
Bolivia
69.1
14.7
13.4
0.0
0.0
1.3
1.5
Chile
30.0
34.2
7.2
9.9
2.5
16.2
0.1
Colom
bia
49.4
26.6
16.6
2.9
0.0
4.5
0.0
Mexico
83.1
2.1
14.8
0.0
0.0
0.0
0.0
Peru
13.0
33.2
13.1
31.2
0.8
7.2
1.5
Urugua
y
55.5
39.6
4.3
0.0
0.0
0.0
0.5
Source: Keeping the Promise, based on data from AIOS, FIAP (data for Colombia).
Note: Information for Colombia refers only to the mandatory pension fund system.
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Conclusions are the author's
Fiscal Deficits Have Grown in Many
Countries with Second Pillars
10.0
9.0
8.0
Deficit as % of GDP
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
Years since pension reform
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Argentina
Bolivia
Colombia
Uruguay
Conclusions are the author's
Savings Rates Increased Only in
Kazakhstan
Trends in Gross Domestic Savings (% of GDP)
Savings as % of GDP
30
25
20
15
10
5
0
12
1
2
3
4
5
6
Years since start of reform
Argentina
Bolivia
Colombia
Kazakhstan
Mexico
Peru
7
8
Hungary
Uruguay
Conclusions are the author's
Market Capitalization Remains Quite
Low
55
50
45
Percent of GDP
40
35
30
25
20
15
10
5
0
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Years since reform
Colombia
13
Hungary
Mex ico
Peru
Conclusions are the author's
Pension Participation Rates Have Not
Changed in LAC
70.0
60.0
% of EAP
50.0
40.0
30.0
20.0
10.0
0.0
1990
1991
Argentina
El Salvador
Ecuador
14
1992
1993
Bolivia
Mexico
Nicaragua
1994
1995
1996
Chile
Uruguay
Brazil
1997
1998
1999
Colombia
Costa Rica
Conclusions are the author's
Policy Lessons for the Future
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Multi-pillar reforms are reasonable when preconditions hold
Multi-pillar reforms may improve fiscal sustainability but only if
related policies are implemented
Secondary impacts on savings and capital formation should be
de-emphasized as funded pensions are not a magic bullet for
growth
Multi-pillar reforms have not increased coverage and, in any
case, only relate to the formal sector
Non-contributory pensions are needed if poverty among the
aged is to be reduced.
PAYG system reform is essential, in particular, increasing
normal retirement ages, making benefits affordable, and
outlawing mandatory retirement.
Conclusions are the author's