February 21, 2014 – Pension systems in emerging Europe and Central Asia (ECA) are facing increasing pressure from the region’s aging populations and shrinking labor force, making it imperative for countries to work on comprehensive, long-term and socially sustainable reforms to ensure pension benefits that protect the elderly poor and future generations.

Countries have a variety of options to ease the pressure on their pension systems, and a key factor is to rethink the social norms around retirement age, according to a new World Bank report entitled “The Inverting Pyramid: Pension Systems Facing Demographic Challenges in Europe and Central Asia.”

Why is it important to focus on retirement age?

Pension systems have evolved over the years. They have become more generous and helped reduce poverty rates among the elderly  – from the first German system where pensioners were older than 70, to the systems today that allow people in good health to retire even younger than 55 in some cases, after 30 years of work.

While life expectancy has increased, effective retirement ages have remained constant or declined in some cases, leading to an increase in the duration of retirement – on average, men spend about 18 years in retirement today, while women spend 23.5 years.

This means that many healthy adults collect pensions for extended periods of time, turning these benefits into income that is sometimes close to what they earned while still employed.

But these benefits were made possible by the growing number of contributors in the past that made the systems flush with revenue, which in turn was spent in making benefits more generous. Now that the number of contributors is falling, such generous benefits are no longer affordable.

Today, pension systems for many ECA countries make up the largest expenditure in their budgets. While many countries are already reforming their pension systems, more has to be done to overhaul the systems in a sustainable manner while preserving their objective of protecting the future generations, especially the elderly poor, according to the report.

SOLUTIONS SUITED TO COUNTRY CONTEXT

While there is no “one-size-fits-all” solution to overhaul pension systems across the region, the report shows that several steps can be taken to prepare for the future.

First, countries could raise retirement ages until the duration of retirement is 15 years, making it affordable to sustain the current benefit structure. People retired, on average, for 15 years as recently as the 1970’s.  Countries could also look at ways to reshape benefits giving a priority to preventing poverty, while retaining the right to retire at 65. A combination of both is also an option, which could make the changes less drastic.

Given that people are living longer, healthier lives than ever before, the labor market must find ways to help and encourage older workers to stay in the workforce, and look past the outdated notion that retirement must occur at a specific age. Myths that older workers will take away jobs from the young or that they are less productive and slower to learn often deter older workers from staying on past retirement age.  Simple workplace accommodations, training geared for aging brains, and encouraging part-time work can help encourage workers to remain employed in some capacity.

Spurring immigration and reducing informal work to keep the formal labor force growing, especially in sectors such as long-term care for the elderly and health services, can also be part of the solution. However, expanding the number of pension contributors by providing coverage to informal workers or allowing more immigration helps the pension system in the short run, as it receives additional revenue, but also means that benefits will have to be paid to even more retirees later which aggravates the financing problem. Still, the move will buy ECA countries some time to implement comprehensive reforms, the report argues.

On the financing side, governments could also think about supplementing financing pension systems with other sources of revenue, including moving away from labor taxes to consumption and property taxes. This would make pension benefits dependent on a general-revenue financed system that provide more basic benefits to the elderly. However, ECA is already a high-tax region and there might not be much room to raise additional revenue.

Workers’ personal savings for retirement also becomes vital in these scenarios. They provide workers flexibility in determining when they want to retire and can raise the level of income that an individual can count on in old age. Measures such as automatic enrollment in savings schemes can help workers supplement their retirement income with their own savings.