World Bank involvement in the privatisation of public pension systems in developing and transition countries

Over the last decade, more than a dozen countries in Latin America and Central and Eastern Europe have partially or completely replaced public pay-as-you-go pension systems with funded systems managed by private financial institutions. The World Bank has been a major catalyst for this shift, providing loans and technical support. This paper examines the main arguments for replacing public pay-as-you-go systems with privately managed funded systems. The authors argue that these have largely misrepresented the problems of pay-as-you-go systems and distorted and exaggerated the benefits of private accounts. This they say has occurred as the result of an overly ideological approach to “reform” from the Bank based on a belief in the “inherent superiority of private providers in each and every circumstance”.

The paper examines the transition to funded systems in a number of countries and outlines a number of deficiencies in the funded systems as compared to the pay-as-you-go systems they replaced. Among these deficiencies are:

• they have generally delivered lower benefits to retirees and disproportionately so to women
• they have been designed, in most cases, to lead to lower coverage of workers than under the previous programmes
• they have proven to be highly inefficient in their administration
• the transition from public to partially or wholly privatised plans has posed enormous fiscal strains on governments most dramatically so in the case of Argentina.

There is also an account of the transition in each of the countries where it has been implemented, examining how the previous systems have been modified and the main features of the new systems that have been established.