Pension provision: government failure around the world

This survey of government interventions in pension provision examines the different issues surrounding pensions and public policy in a range of high, middle and low-income countries.In particular it argues that widespread difficulties with state pension schemes make it surprising that there is not more favourable acceptance of private provision for income in old age.

The authors’ main conclusions argue that:

• the combination of ageing populations and state-backed unfunded pay-as-you-go (PAYGO) pension systems means that many high-income democracies will face severe fiscal problems in years to come
  
• reform of PAYGO systems, as currently designed, will be practically impossible as they create large vested-interest groups that benefit from the system. Older people form a large voting block that can capture the political process, making political parties unwilling and unable to effect reform
  
• state systems crowd out private savings systems. The private sector, while not perfect, achieves far better outcomes than state PAYGO systems, but is often hampered by myopic legislation, which makes pensions savings in many countries incomprehensible and needlessly expensive
  
• India and China are in particularly poor shape. China faces a demographic time bomb more severe than any developed country, caused by its one-child policy. India has a much younger population, so its demographic problems are deferred. The pension landscape in India is, however, characterised by state interference and harmful legislation
  
• the World Bank’s three-pillar design framework for pension reform comes under particular scrutiny and is criticised for ignoring informal support systems. The author of this chapter argues for a system that includes extra pillars covering family support and longer working lives

The authors strongly believe that PAYGO systems should be cut back, and people given the freedom to save for themselves as only they can decide the most appropriate vehicle for their own circumstances. They reject the World Bank blueprint of formal, structured pension systems. They suggest instead that governments focus on ensuring that the legal and financial infrastructure exists to allow people to make proper provision for their retirement. So-called 'market failure' will always ensure that the result is imperfect. But, by comparison, government failure around the world has had catastrophic effects.