World Bank says retire creaking pension systems

FROM Boston to Beijing, the overall age of the world population is rising, as fertility rates fall and life expectancy increases. But formal and informal financial-security systems for seniors aren't keeping pace with the need.

In developing nations, urbanization, increased mobility, wars, and famine are undermining traditional elderly support arrangements. Many poor countries are considering adopting the industrial world's pension programs. But a new World Bank report warns these are not good models.

Not only are the programs hampered by skyrocketing costs that require high tax rates and deter private-sector growth, they are also failing to protect the old. In part, this is because they are not indexed for inflation.

The report, as a result, predicts ``a looming old-age crisis.'' In order to better cope with this crisis, the World Bank recommends the gradual implementation of three systems: a publicly managed, mandatory plan to reduce old-age poverty; a privately managed, mandatory savings scheme; and voluntary saving.

But some social-security experts question the alarming message and start-over advice of the World Bank's ``Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth.''

``I think it was dangerous to use the world `crisis,' '' says Dalmer Hoskins, secretary-general of the International Social Security Association in Geneva. ``I'd say it's an absolute necessity to adjust programs to fit economic circumstances, and this is being done through changing benefit formulas, raising the retirement age, offering disincentives for early retirement....''

Mr. Hoskins adds that making the report's changes is ``almost politically impossible in industrialized countries'' because of the high cost of shifting systems while also paying out pensions.

Stanford Ross, a director of the National Academy of Social Insurance in Washington, calls the study ``a major landmark in the development of thinking about social security.'' But he adds: ``Its efficacy and applicability to any particular country is not clear.''

Currently, Africa and parts of Asia rely largely on informal mechanisms, such as extended-family arrangements and mutual-aid societies, for example. Their challenge is to move toward public or privately run systems slowly, without asking government to do more than it can handle.

After years of liberal early-retirement provisions and generous benefits, Latin America, Eastern Europe, and the former Soviet Union can no longer pay promised benefits. Chile has successfully restructured its system, and other nations in these areas are making changes or thinking about them.

In Organization for Economic Cooperation and Development nations, public programs have also paid out large pensions, while poverty has fallen faster among the old than the young. But payroll taxes are expected to climb and benefits to decrease, worsening the conflict between retirees and young workers.

The most common old-age-security arrangements now are:

r Public pay-as-you-go. Mandatory for covered workers in all countries, these programs redistribute income and offer defined benefits not actuarially tied to contributions; their financing comes from a payroll tax, sometimes supplemented by general government revenues.

* Occupational. These privately managed pensions offered by employers have tended to be defined-benefit and partially funded, meaning that earnings from employee-financed investments are used to help pay benefits.

* Personal saving and annuity. These are fully funded, defined-contribution plans. Workers and retirees bear the investment risk.

Most countries combine redistribution, saving, and insurance functions of an old-age-security arrangement in a ``single pillar.'' But these systems have problems with efficiency, distribution, and misuse, the report states.

It recommends two mandatory and one optional program instead.

* Publicly managed, tax-financed. These programs pay earnings-related, flat, or means-tested benefits to older people, redistribute income to the poor, and co-insure against low investment returns, recession, inflation, and private-market failures.

A flat pension (providing a basic income level to all older people), means-tested pension (according to income), or, in countries that already have a mandatory saving plan, a minimum pension guarantee are better choices than the earnings-related option, which often results in poor redistribution because it favors high-income workers.

* Privately managed, fully funded mandatory saving plans. These systems link benefits to costs. They earn more, charge lower contribution rates, and pay higher benefits than public plans because they are invested in the open market.

* Voluntary occupational or personal saving plans offer extra protection for those people who want more income and insurance later on in life.

But the report ``tends to be more negative about traditional defined-benefit programs, like Social Security,'' Mr. Ross notes, ``and more enthusiastic about defined-contribution plans than many people think is justified.''