Archive for the ‘Pensions’ Category

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an internal review of World Bank pension advice

Saturday, March 3rd, 2012

I was aware of the existence of this 2006 internal review of World Bank assistance with pension reform, but must confess that only recently did I actually read it. This was an eye-opening experience. The report contains the following sentences on the first page of its opening chapter:

The World Bank has been a leader in assisting countries in pension reform. Since 1984 the Bank has helped 68 countries reform their pension systems with more than 200 loans and credits. In addition, the Bank has issued over 350 papers and publications on pension reform. This report is the first comprehensive evaluation of the Bank’s involvement ….

During the 1990s the Bank was criticized for following a dogmatic approach, providing little support for the improvement of public systems and aggressively promoting the privatization of social security, regardless of the country’s characteristics and initial conditions. Critics claimed that the Bank oversold the benefits of multipillar systems, particularly the benefits of a new second pillar [of private accounts], while simultaneously underestimating the advantages of publicly managed programs.

Independent Evaluation Group-World Bank, under the direction of Emily S. Andrews, Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance, World Bank, 2006, p. 3.

Surprisingly, for an internal document, the report contains much information in support of this criticism, and little in defence of the usefulness or effectiveness of World Bank assistance. Here are just two examples of many criticisms that can be gleaned from this 143-page document:

[The Bank] often failed to prioritize the need for developing options for old-age safety nets outside the formal pension system in low-income and low-coverage countries. Out of eight low-coverage Latin American countries3 that enacted multi-pillar systems with World Bank support, only Bolivia created a comprehensive safety net, the Bonosol, in conjunction with its multi-pillar reform. ….

[T]he Bank did not analyze the effectiveness of noncontributory options in countries such as Albania, Bosnia and Herzegovina, and the Kyrgyz Republic, where coverage is low or declining. In Asia, Korea added a noncontributory emergency pension with World Bank support in the context of parametric reforms, but China has not addressed the issue of old-age rural poverty, even though the formal system covers only about 20 percent of the population. With the exception of Mauritius, coverage rates in African countries where the Bank has held discussions are less than 15 percent. In Zambia, which received significant World Bank funding to redesign its PAYG [pay-as-you-go] system, neither the Bank nor the country undertook an analysis to identify needs and options, as feasible, for reducing poverty among the current and future uncovered elderly, an exercise that should have been conducted simultaneously with Bank funding for PAYG redesign.

IEG-World Bank, 2006, pp. 20-21.

[T]he Bank’s advice has not always been effective or consistent. ….

The Bank’s focus on pension reform most often has been sparked by concerns about fiscal sustainability ….

Nonetheless, while addressing funding gaps, too often the Bank has not addressed sufficiently the primary goal of a pension system to reduce poverty and provide adequate retirement income within a fiscal constraint. It has also focused insufficient attention on the income of the aged.

IEG-World Bank, 2006, p. 55.

HT to Professor Nick Barr for encouraging me to read this devastating critique of World Bank policy.

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toward a universal minimum pension in Japan

Wednesday, February 22nd, 2012

Well, it is not fully universal. Japanese who have received ‘too much’ lifetime income need not apply, even if they are living in poverty in their old age. Those drafting the legislation believe that it will take about 40 years for the new minimum pension to take shape, beginning in 2016.

The Democratic Party of Japan has released a set of scenarios that could be applied to fundamentally reform the public pension system, with a guaranteed minimum pension of 70,000 yen [US$850] a month at its core. ….

The 70,000 yen minimum guaranteed pension will be paid in full to people whose lifetime average annual income is up to 2.6 million yen [US$32500], according to the calculations.

The amount will drop for people whose incomes are higher, with those earning a lifetime average annual income of more than 6.9 million yen [US$86250] ineligible to receive the minimum guaranteed pension.

As this scenario requires … a consumption tax rate hike of 7.1 percentage points …, public opposition is likely to be strong.

Therefore, the government has come up with other scenarios to minimize the tax hike by reducing the ranges of recipients who will receive the pension.

Basically, people whose lifetime average annual income is zero will receive the full minimum guaranteed pension. For others, the amount will gradually drop in accordance with income levels.

The different scenarios set levels at which the minimum guaranteed pension will be stopped at 6.9 million yen, 5.2 million yen or 3.8 million yen.

In these scenarios, the hike in the consumption tax rate will be lowered to between 2.3 and 4.9 points. ….

In response [to a question], Deputy Prime Minister Katsuya Okada said, “The annual income is calculated for individuals. In the case of couples, the minimum guaranteed pension will not be withheld from those with lower incomes.”

“DPJ releases pension scenarios“, The Daily Yomiuri, 12 February 2012.

HT: Charles Knox-Vydmanov of HelpAge International

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praise for basic pensions

Tuesday, February 14th, 2012

The answer to the pension problem is relatively simple, unlikely though it may seem. In the Organisation for Economic Co-operation and Development (OECD), we have repeatedly reached the … conclusion … [that] three types of reform … [should be] introduced. The first involves … postponing the age of retirement to keep pace with the increase in life expectancy; the second, concentrating the public system more on basic social pensions aimed at alleviating and preventing poverty during retirement; and the third, developing private pension saving. … [emphasis added]

[Do not forget, though,] that the private pension systems themselves also represent a fiscal cost for the government. For instance, voluntary saving is often encouraged by fiscal incentives that may put a heavy burden on the public purse. Furthermore, these incentives do not always have the progressive aim and increased coverage that is claimed ….

A country like New Zealand …,even though it has one of the lowest levels of public expenditure on pensions in the whole OECD, achieves better protection against poverty for people of retirement age through the basic pillar.

Juan Yermo, “Unwinding pension reforms – An OECD perspective”, in Advancing in the Strengthening and Consolidation of the Individually-Funded Pension Systems (International Federation of Pension Fund Administrators – FIAP, Santiago, Chile, 2011), pp. 195-204.

Mr Yermo heads the OECD’s Private Pensions Unit. He makes some good points, but  fails to mention that New Zealand’s basic pension is universal – everyone, rich or poor, receives the same flat pension – and that New Zealand is the only member of the OECD that does not require workers to participate in a contributory pension scheme.

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New Zealand’s 1898 social pension

Tuesday, February 14th, 2012

The University of Auckland’s Retirement Policy and Research Centre (RPRC) in its first Pension Briefing for 2012 looks at New Zealand’s original Old Age Pension, introduced in 1898 for residents aged 65 years and older. Then, as now, no contributions were required, but the pension was far from universal. A pension of £18 a year (about a third of the average wage) or less was payable only after satisfying a long list of conditions.

[S]ome were specifically excluded under section 64 of the Act:

  1. Maori (the actual words used were “aboriginal natives of New Zealand”) …;
  2. Aliens;
  3. Naturalised subjects unless they had been naturalised for at least five years;
  4. “Chinese or other Asiatics, whether naturalised or not.”

To qualify for the pension, an applicant must have “…resided continuously in the colony for twenty-five years.” ….

There was a long list of other qualifying conditions …:

  • “He must not during the past twelve years have been imprisoned for four months or on four occasions for an offence punishable by twelve months’ imprisonment.
  • He must not during the past twenty-five years have been imprisoned for five years for any offence.
  • He must not at any time have deserted his wife and children … ….
  • He must have lived a sober and reputable life during the past five years. ….
  • He must not have deprived himself of property or income to qualify for a pension.” ….

The income-test started at £34 and the pension was reduced by 100% of excess ‘other income’ so that, if yearly income exceeded £52, there was no state pension. For assets, the threshold was just £50 and the pension reduced by £1 for every £15 above that. With ‘net assets’ (after the initial allowance) of £270 or more, again there was no pension. ….

Applicants had to renew their ‘pension-certificates’ each year. The income and assets tests were the most obvious reason for doing that. …. However, the other conditions as to character, convictions and reputation were all part of that annual process. ….

Although New Zealand was at the forefront of state-provided pensions in 1898, the benefit was by no means ‘universal’ in the way that New Zealand Superannuation now is. About two thirds of the over-65s did not receive it and only some of those would have had more income and/or assets than the maximum allowed. The intrusive and public nature of the examinations of income and assets would have deterred many.

Modern sensibilities react negatively to the direct discrimination against New Zealanders of Asian descent (that was not eliminated until 1936); some would also be surprised at very public, continuous nature of the tests of character and reputation.

“Part of our pensions past: the 1898 Old Age Pension“, RPRC Pension Briefing 2012-1 (14 February 2012).

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Rowe on retirement

Monday, February 6th, 2012

By saving, and by paying taxes to support government pensions for retirees, we smooth consumption over our lifetime. In striking contrast, we don’t smooth our ‘consumption’ of leisure, taking much of it in one large chunk (known as ‘retirement’) in the last years of life. Nick Rowe asks, Why?

If real interest rates were higher than your subjective rate of time preference, then you would choose a consumption path that is smoothly growing over time. You would consume more when old than when you were young. For all other consumption goods, some people act a bit like that, and others don’t. Some people consume a bit more when old than when young, and others consume a bit less when old than when young. But when it comes to the consumption of leisure, we don’t act at all like that. We consume roughly the same amount of leisure every year. And then we suddenly go on a massive consumption binge for the rest of our lives. Why?

As we have gotten richer over the last two centuries, we have chosen to spend a greater proportion of our lives consuming leisure rather than working. But I think I’m correct in saying that by far the biggest increase in our leisure has been in that big bunch of leisure at the end of our lives. Most people used to work until they died. Now most people stop working and then consume a decade or two of leisure before they die. Proportionately, the growth in leisure taken in retirement massively exceeds the growth of coffee breaks, lunch breaks, evenings, weekends, and holidays. The income elasticity of demand for retirement leisure massively exceeds that of all other forms of leisure. Why?

Nick Rowe, “Retirement and the non-smoothing of consumption of leisure“, Worthwhile Canadian Initiative, 4 February 2012.

Observe and participate in the discussion over at Worthwhile Canadian Initiative.

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an early proponent of universal pensions

Sunday, February 5th, 2012

Tom Paine in 1795 called for the creation of a pension for everyone from age 50, financed from an estate tax. The proposed pension, he wrote, was “not charity but a right, not bounty but justice”.

[Government must] create [from the proceeds of a 10% inheritance tax] a national fund, out of which there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property.

And also, the sum of ten pounds per annum, during life, to every person now living, of the age of fifty years, and to all others as they shall arrive at that age. ….

It is not charity but a right, not bounty but justice, that I am pleading for. ….

I care not how affluent some may be, provided that none be miserable in consequence of it. But it is impossible to enjoy affluence with the felicity it is capable of being enjoyed, while so much misery is mingled in the scene. ….

I do not suppose that more than one family in ten, in any of the countries of Europe, has, when the head of the family dies, a clear property of five hundred pounds sterling. To all such the plan is advantageous. That property would pay fifty pounds into the fund, and if there were only two children under age they would receive fifteen pounds each (thirty pounds), on coming of age, and be entitled to ten pounds a year after fifty.

It is from the overgrown acquisition of property that the fund will support itself; and I know that the possessors of such property in England, though they would eventually be benefitted by the protection of nine-tenths of it, will exclaim against the plan. But without entering any inquiry how they came by that property, let them recollect that they have been the advocates of this war, and that Mr. Pitt has already laid on more new taxes to be raised annually upon the people of England, and that for supporting the despotism of Austria and the Bourbons against the liberties of France, than would pay annually all the sums proposed in this plan.

Thomas Paine, Agrarian Justice (1795).

Tom Paine (1757-1809) is best known as author of the revolutionary pamphlet Common Sense (1776), in which he called for independence of British colonies in North America.

From the Thought du Jour archive, 17 August 2007.

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the cost of universal pensions

Thursday, February 2nd, 2012

I have prepared notes on “Universality and the cost of basic pensions” for presentation at a meeting convened by HelpAge International, and thought that they might be of interest to at least some TdJ readers. These brief notes bring together my thoughts on means tests, and why I believe that they are almost always inferior to universal benefits.

A typical reaction to universal pensions is “That’s a great idea, but we can’t afford it, so prefer to give pensions only to those who need them”. This reaction appears to be common sense, but it is wrong. Means tests shift costs, but do not lower them because means tests are taxes on income or assets. They are paid by elderly citizens and, sometimes, their families. It is more efficient to fund basic pensions with general taxes paid by everyone. All taxes, with the exception of head taxes, distort choices. Of particular concern are taxes that discourage work and saving. Low taxes levied on an entire population are less distorting than high taxes levied on the elderly.

This is the efficiency argument for universality. It is valid even with costless and perfect targeting, with no stigma, no exclusion errors, no erosion of political support. It is a simple argument, yet often ignored because means tests are usually recorded as expenditure reductions rather than as tax collections. Framing is important. A message that means tests are taxes could appeal to voters across the political spectrum.

It is important to recognize that, even though universality is optimal, all means tests are not equally bad. Clear, simple rules are preferable to complex regulations that leave discretion to government bureaucrats. Rules matter more than whether the number disqualified by targeting is small (an ‘affluence test’) or large (a ‘means test’?). The term ‘affluence test’ is imprecise and adds nothing to our understanding of means tests.

…. continued here.

A typical reaction to universal pensions is “That’s a great idea, but we can’t
afford it, so prefer to give pensions only to those who need them”. This reaction
appears to be common sense, but it is wrong. Means tests shift costs, but do not
lower them because means tests are taxes on income or assets. They are paid by
elderly citizens and, sometimes, their families. It is more efficient to fund
basic pensions with general taxes paid by everyone. All taxes, with the exception
of head taxes, distort choices. Of particular concern are taxes that discourage
work and saving. Low taxes levied on an entire population are less distorting
than high taxes levied on the elderly.

This is the efficiency argument for universality. It is valid even with costless
and perfect targeting, with no stigma, no exclusion errors, no erosion of
political support. It is a simple argument, yet often ignored because means tests
are usually recorded as expenditure reductions rather than as tax collections.
Framing is important. A message that means tests are taxes could appeal to voters
across the political spectrum.

It is important to recognize that, even though universality is optimal, all means
tests are not equally bad. Clear, simple rules are preferable to complex
regulations that leave discretion to government bureaucrats. Rules matter more
than whether the number disqualified by targeting is small (an ‘affluence test’)
or large (a ‘means test’?). The term ‘affluence test’ is imprecise and adds
nothing to our understanding of means tests.

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PensionReforms update

Wednesday, January 25th, 2012

The latest RPRC Update, a quarterly publication of the Retirement Policy and Research Centre at the University of Auckland (New Zealand) is now available online. On page 4 is the following note:

PensionReforms loads 500th abstract
PensionReforms, sponsored by the then newly formed Retirement Policy and Research Centre at the University of Auckland?s Business School, was launched in 2006.

The milestone abstract (the 500th), loaded on 2 November, is about the pension problems faced by China: state and private pensions aren’t working so reform is needed. Why not a Universal Pension? Benefit design will determine cost. The pension may improve social/political security and reduce the gap between rural and urban populations more.

Top ten by visitor numbers since 2006:
1. Sri Lanka – Universal Pensions (2008) more
2. Mauritius – Universal Pensions (2003) more
3. Saving in the absence of property rights (2006) more
4. Chile – 20 year review (2004) more
5. OECD – Pensions at a Glance Asia (2009) more
6. EC – ageing populations (2009) more
7. New Zealanders – behaving rationally (2007) more
9. World Bank re-thinks three pillars (2005) more
10. New Zealand – why extend KiwiSaver? (2007) more

For unknown reasons, abstract #8 is missing. This list differs somewhat  from the “Top 10” list at www.PensionReforms.com, so I was unable to correct it.

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Vicente Fox on universal pensions in Mexico

Sunday, January 22nd, 2012

Back in 2005, when the Mayor of Mexico City (Andrés Manuel Lopez Obrador) launched his campaign for the presidency, the incumbent President attacked AMLO’s plan to offer provide cash pensions to every resident of Mexico from the age of 70. Fox was a member of the conservative PAN. Its candidate, Vicente Calderón, won a disputed election in which AMLO finished a close second.

President Vicente Fox yesterday criticized the programme of support to the elderly provided by the government of the city of Mexico….

With that we cannot construct schools, universities nor hospitals, the chief executive complained.

…. “To me it seems terribly unjust that some persons, solely because they happen to be elderly, receive money from those who are working”, he explained.

For the head of Government what should be encouraged, in the case of pensions and retirement, is that “during their productive life people do just a little bit of saving, because otherwise a chilling amount of resources will be needed” [from the State].

…. [T]he president announced that he would submit to the Congress an initiative to bring those who work in the informal sector into the tax collection system [i.e., force them to pay taxes].

“Apoyar con dinero a ancianos es ‘terriblemente injusto’, expresa Fox“, La Jornada (Mexico, D.F.), 13 March 2005.

Just a few hours after President Fox spoke …, the Mayor of Mexico City, Andrés Manuel Lopez Obrador, emphasized that the universal citizen’s pension constitutes a measure of justice for those who have worked and contributed to the support of the country.

…. During his speech… he [the Mayor] pointed out that “even the World Bank advises other governments to copy the universal citizen’s pension developed in Mexico City. And they (the federal government) now say that it is unjust “.

…. He also said that “technocrats only bring bad examples from abroad, but they should also notice that European countries grant universal pensions from the age of 65 years”.

Bertha Teresa Ramirez, “López Obrador: con austeridad, viable en todo el país la pensión universal“, La Jornada (Mexico, D.F.), 14 March 2005.

Originally posted in 2005, when TdJ was distributed only as group email. Translated freely from the Spanish by Larry Willmore. The links above are to the full articles. If you are able to read Spanish, you will enjoy them. I have translated only short segments of each article.

This, in Spanish, is a key statement that President Fox made in his radio address to the nation:

A mí me parece terriblemente injusto que a otros, simple y sencillamente por estar como adultos mayores, se les cubra con el dinero precisamente de quienes trabajan.

And this is my translation:

To me it seems terribly unjust that some persons, solely because they happen to be elderly, receive money from those who are working.

In Mexico it had been traditional for incumbent Presidents to remain aloof from politics, but Fox did not respect this tradition. He seized every opportunity to attack AMLO and support the PAN candidate.

Incidentally, AMLO is once again running for President, promising a universal age pension that reaches all Mexicans. The recent initiative of Calderón – extending 70+ pensions to urban areas – takes the wind out of AMLO’s sails. The timing could not be worse (for AMLO).

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non-contributory pensions in Mexico

Sunday, January 22nd, 2012

It is difficult to keep up with events in Mexico. The pension scene changes almost daily.

The extension of the rural 70+ scheme to urban areas is now official, and was communicated to the nation last Tuesday (17 January) by President Felipe Calderón, speaking in Naucalpan, a city located just northwest of Mexico City in adjoining State of Mexico which – in sharp contrast to Mexico City – offers no pensions to its elderly citizens. Anyone who receives an earnings-related pension from the social security system (IMSS) or from the civil service (ISSSTE) is not eligible for an urban 70+ pension. Urban pension benefits are identical to those of rural pensions – $500 pesos (US$37) a month – but urban beneficiaries will receive bi-monthly credits on a debit card, whereas rural beneficiaries receive benefits in cash or direct deposits.

Will rural pensions now be pension-tested as well? This is not clear. The government’s 70+ webpage continues to list only three requirements for eligibility:

a) Be at least 70 years old
b) Reside in a community with 30,000 inhabitants or less
c) Agree to suspend any benefit the applicant might receive from the [federal] Human Development Programme Oportunidades

The webpage offers no information for applicants who reside in communities larger than 30,000 inhabitants. For a government that prides itself on transparency, this lack of information is troubling.

I fear the worse. The conservative PAN (National Action Party) that controls the executive branch of the federal government has opposed non-contributory pensions in general, and universal pensions in particular. The former Mayor of Mexico City, Andrés Manuel López Obrador (born 1953), initiated universal pensions in 2001, then ran for President of Mexico in the federal elections of 2006. He lost by one percentage point to the PAN candidate, Felipe Calderón (born 1962), in a contested vote. AMLO promised, if elected, to extend Mexico City’s universal pension to all Mexico. Calderón, backed by the then incumbent President Vicente Fox (also from the PAN), repeatedly and strongly voiced his disagreement with AMLO’s pension manifesto. It was AMLO’s political allies in Congress who initiated – with no support from President Calderón – legislation for the rural 70+ pension scheme. Have the views of Felipe Calderón and his party changed so radically? I sincerely hope so. But I doubt it. This might well be strategic behaviour in an election year. This is why I fear the worse. (Mexican presidential elections take place every six years, and the incumbent is not allowed to run for re-election.)

At a minimum, I have no doubt that the government will eventually subject pensions in rural areas to the same tests as pensions in urban communities, although they may wait until after the 2012 elections to do this. It defies logic to think that rural applicants will escape a pensions test to which urban residents are subjected.

What will happen to state programmes when the federal 70+ programme commences in urban areas? Will pensioners in states with generous benefits be forced to shift to the federal scheme, with reduced benefits? This question is especially important for Mexico City, where universal pension benefits are $897 pesos a month, almost double the $500 pesos of the 70+ scheme. Moreover, the age of eligibility in Mexico City fell in 2009 from 70 to 68 years, and benefits are indexed to consumer prices. In the case of 70+, both benefits and the age of eligibility have been frozen since 2007. This is not a prediction, but one possibility is that the federal government might allow state governments to top up the federal benefit, and/or provide full benefits to seniors younger than 70 years.

A universal minimum pension for all Mexicans, with allowance for state top-ups and early pensions, would introduce only modest complexity into the 70+ scheme, with a simple pension test that does not stigmatise beneficiaries.

My fear is that the federal government will not stop with a pensions-test, but will instead move on either to geographic targeting or to more stringent means-tests. Geographic targeting is very crude. Some districts of urban Mexico contain both mansions and shacks, so there will be inevitable errors of inclusion and exclusion. Individualised means tests have even more problems, not least of which is more opportunity for corruption, for payment of ‘mordidas’ (bribes) to officials so that they will certify an applicant as poor.

The information so far is mixed, so it is difficult to know whether tests of eligibility will go beyond age, residence and income from other pensions. Officials from the federal ministry of social development (SEDESOL) in Chihuahua and Guanajuato told journalists that the their goal is to ensure that all residents aged 70 years and older, regardless of socioeconomic status, have a pension. The position of SEDESOL officials in Chiapas and Yucatan, in contrast, is that the 70+ programme will be targeted to those living in poverty in urban areas, but they never define what they mean by “poverty”. The news report from Yucatan is especially detailed. The representative of SEDESOL in Yucatan explained that applicants with no other pension income, who meet age and residence requirements, will be invited to provide the information required for a socioeconomic information card (Cédula Única de Información Socioeconómica). This procedure takes about 35 minutes. Those whose applications are approved can expect the bi-monthly pension to commence in May/June of this year.

The mixed information and lack of guidelines for this initiative is worrisome. So much for the transparency and clear rules promised by President Calderón!

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