In 1994, the World Bank set out its thinking on pensions in developing countries in a landmark report. “Averting the Old Age Crisis” became the reference point for the Bank's approach—one given clout by its lending power. It advocated a move away from pay-as-you-go financing, under which contributions from workers pay for today's pensions... The report backed, where possible, a much bigger role for compulsory funded pensions, paid for by workers saving part of their earnings in retirement accounts.
Eleven years on, the Bank has taken stock, reviewing how reforms have worked and taking account of criticism and new ideas. The result is a new report, to be released on February 21st. “Old-Age Income Support in the 21st Century”, a copy of which The Economist has seen, is intended to be the definitive guide to the Bank's current thinking...
The new report says that the case for the Bank to support pension reform has grown stronger in the past decade. Existing systems are not good enough. “Most pension systems in the world,” it argues, “do not deliver on their social objectives, they contribute to significant distortions in the operation of market economies, and they are not financially sustainable when faced with an ageing population.”
... In Latin America, for example, reforms to expensive pay-as-you-go schemes have improved governments' long-term fiscal positions. The new funded individual accounts have been costly to run but have generally delivered impressive returns. Nevertheless the number of future pensioners who will benefit looks set to be disappointingly low, because many workers are not covered by the new arrangements...
Since “Averting the Old Age Crisis”, there has been fresh thinking about reforming existing pension systems. Sweden pioneered the idea of “notional accounts”. These maintain pay-as-you-go financing, but treat workers' contributions as if they were paid into individual accounts, which then form the basis of their pension benefits. Poland and Latvia have also adopted the system. At first, the Bank was sceptical about this idea. However, it has since recognised the potential of notional accounts, which establish a tight link between payroll contributions and eventual pension benefits. They are, says the report, a “promising approach to reform or to implement an unfunded first pillar”.
The report did not appear to be available at the time of this post.