Financing Old Age 2010

Populations are ageing in most developed countries, but increasingly also in emerging economies. Rising expenditures for pensions as well as health care and long-term care will claim an increasing share of governments’ or families’ incomes. Ensuring both adequate old-age incomes and the long-term financial sustainability of pension and health-care systems remains a huge challenge.

In a number of emerging economies, most notably in China, pension systems are still underdeveloped and cover only a small part of the population. In the developed world, many pension systems at current rules are not financially sustainable. In response to large implicit pension liabilities, various approaches to pension reform have been put forward, such as increasing the role of private and prefunded pension schemes, reducing public pension benefits, increasing pension age and reducing incentives to retire early.

The recent financial and economic crisis has highlighted further risks inherent in both public and private pension systems. While rising unemployment and sharply increasing government debt is putting additional stress on public finances and pay-as-you-go pension schemes, the substantial fall in asset prices has underlined the risks associated with pension funds invested in the financial markets. In the current environment there is the danger that immediate pressures on policy to act result in poorly designed short-term responses with negative long-term consequences for the capacity of pension systems to provide adequate levels of retirement income on a sustainable basis.

What are the lessons of the financial crisis for the appropriate balance of private and public schemes in the pension system? How can the resilience of pension systems to macro-economic shocks be increased? What are the implications for the design, regulation and supervision of private pensions systems? Are there implications for the financing of health care and long-term care? What can government and the financial industry do to help people make informed choices when planning for their old age?

What can migration policies and policies raising fertility contribute to easing the demographic challenge? How could people be encouraged to prolong their working lives? What can government and business do to help elderly workers to acquire the skills and to preserve the physical and mental health needed to remain productive and competitive in today’s work environments? Should there be specific pension arrangements for workers in particularly hazardous or arduous jobs? Is there a lesson from developed countries’ experience for emerging economies which are still only developing old-age pension systems? How can politicians find support for successfully implementing the necessary reforms?