The new report analyzes the impact of the financial crisis on pension systems of ECA countries, reviews the initial policy responses by individual governments, and provides recommendations on how to strengthen pension systems in the region both in the short- and long-term. World Bank experts concluded that though pension systems in ECA come in all shapes and sizes, no pension system, however well structured, proved immune to the crisis.
“The financial crisis affects each component of a pension system differently, and while magnitude and timing may be different, each component is adversely affected,” said Anita Schwarz, main author of the Report and the World Bank Lead Economist in the Europe and Central Asia Region. “Sharp falls in output and reduction of the overall tax base reduced public funds available for pension systems, while at the same time growing unemployment, drops in wages, and depreciation of financial assets negatively affected systems financed by worker and employer contributions.”
The new study finds that ECA countries, once hit with a sudden shock to the fiscal balances of their pension systems, started considering and implementing policy changes that both increase resources and cut expenditures. The report warns policymakers that actions which generate short-term benefits may involve additional costs in the future. According to one simulation, even the most severe scenario of the financial crisis pales in comparison with the effects of the demographic crisis that is looming in the region.
“It is alarming to look at what the Europe and Central Asian countries are soon to face as the region continues to age,” said Schwarz. “Future pension system deficits can be threefold than what is currently expected, and are expected to remain at that level for more than 20 years before slightly improving. Policymakers need to use the opportunity of the current crisis to address long-term issues, which could bankrupt pension systems precisely when the numbers of people who need them are growing.”
Given the diversity of ECA countries, there is no one blueprint for reforms. Broadly, the report recommends – depending on the country – a combination of measures, including moving to inflation indexation of pensions after retirement, increasing the retirement age and equalizing the retirement age of men and women, and reducing early retirement. In addition, it suggests provision of better insurance against the volatility of financial markets, and calls for the acceleration of regulatory and supervisory reforms that will allow pension funds to earn better rates of return along with further development of capital markets. Finally, it urges governments to promote awareness among their citizens that public pensions will need to be less generous than in the past if they are to be sustainable.
Pension Crisis Policy Note Final
Summary
The financial crisis has significantly impacted pension systems in the Europe and Central Asia region (ECA)* tempting governments to make policy changes in response to the increased pension deficits they are facing. The crisis exacerbates the existing financial imbalance in the public pension systems by reducing contribution revenues sharply while leaving expenditures constant or even higher. The crisis also resulted in a sharp drop in financial asset values which affects pensions provided by funded pillars. Consequently, no pension system, however structured, has been immune to the crisis.
Section 1: Impact of the Financial Crisis on Pension Systems
Pension systems in the ECA region come in all shapes and sizes, and one of the key lessons from the crisis is that no pension system is immune from the global financial and economic crisis. Most countries in the region have three pillars in their pension system, a zero pillar, typically a first pillar, but sometimes a second and a third pillar. Eleven of the thirty countries have all four pillars.
Section 2. Initial Policy Responses by Countries
Hit with an abrupt shock to the fiscal position of the public pension scheme, countries started considering and implementing policy changes across the key pillars, as shown in Table 3. The immediate concern was improving the fiscal balance, by generating additional resources for the public pension system or by cutting expenditures. However, policymakers need to be aware that measures that generate short-term gains may involve additional costs in the long run
Section 3. The Real Crisis is Yet to Come
Despite the pain countries have endured during the global financial and economic crisis, the impact of this crisis pales in comparison to what the countries are soon to face as the region continues to age. It is sobering to look at the impact of the most severe version of the global financial crisis next to the impact of the demographic crisis to come, as shown in Figure 5. Future pension system deficits are expected to be threefold what is currently being experienced in the worst hit countries and are expected to remain at that level for more than 20 years before slightly improving.
Section 4. Conclusions
While the financial crisis has hit pension systems in the ECA region hard, the real crisis is yet to come. Despite the pain countries have endured during the global financial and economic crisis, the impact of this crisis pales in comparison to what the countries are soon to face with the aging demographic transition.
