Central and Eastern European (CEE) countries may be justified in returning to one-pillar pension systems, but they must also consider the risks of the “inverting pyramid”, where future benefits are inversely linked to life expectancy, the World Bank has warned.
In the wake of the financial crisis, several countries in the CEE region – including Hungary, Poland and Lithuania – sparked controversy after abandoning their multi-pillar approaches to pensions and reverting to state pension-only systems.
As the World Bank acted as midwife for the multi-pillar pension systems of several countries in the region, IPE asked Anita Schwarz, lead economist for the Human Development Group of the World Bank’s Europe and Central Asia Region, for her thoughts on these recent developments.
Schwarz took pains to emphasise that countries had “options” to revisit the mechanisms they used to address pension adequacy.
She said many CEE governments’ initial plan had been to bridge the medium-term impact of transferring some of the pension contributions into a second pillar through privatisation.
However, “it proved difficult for successive governments to secure a sufficient stream of non-debt revenues to finance the costs of the reform”, particularly after 2008, when automatic stabilisers boosted spending to mitigate the impact of the global financial crisis.
“As a result,” Schwarz said, “some of these countries chose to roll back their pension reforms.”
She stressed that the World Bank was “not wedded” to a single mechanism for addressing pension adequacy or sustainability in the face of ongoing demographic changes.
“But we do think it is important for countries to have a plan going forward on how they will address these demographic challenges,” she said.
To help countries “think through” some of these important policy issues, the World Bank will be publishing a report in February entitled ‘The Inverting Pyramid’.
The title refers to the way benefits are calculated in Poland and other CEE countries, where future benefits are inversely linked to life expectancy.
“That is, as life expectancy increases, the monthly benefit for successive cohorts will be reduced,” Schwarz said.
Citing research by the World Bank and other sources, she estimated that average pension benefits would fall from about 50% of the average wage today to around 25-30% in future.
One of the questions facing CEE countries and many others, Schwarz said, is “whether such a level of benefit can be considered adequate and socially acceptable for future retirees”.
Raising the retirement age is one of the solutions to the problem, she said, but “how high are countries willing to let retirement ages go?”