World Bank Sounds Alarm on Pension Crisis

Zero Hedge

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Bill Tufts, publisher of the blog Fair Pensions for All, gave me a heads up that the World Bank released a report on Tuesday, Financial Crisis Hits Pension Systems in Europe and Central Asia:

The
financial crisis has significantly impacted pension systems in the
countries of Europe and Central Asia (ECA)* and many of the governments
have been tempted to make policy changes in response to the increased
pension deficits, says ‘Pensions in Crisis,’ a World Bank Regional report released today.

 

But
despite the severity of the crisis, it pales in comparison to the
demographic crisis which the region will face, and World Bank experts
urge countries in the region not to make any policy changes focused on
addressing short-term fiscal concerns that make the long-term even
worse.

 

The new report analyzes the impact of the financial
crisis on pension systems of ECA countries, reviews the initial policy
responses by individual governments, and provides recommendations on
how to strengthen pension systems in the region both in the short- and
long-term. World Bank experts concluded that though pension systems in
ECA come in all shapes and sizes, no pension system, however well
structured, proved immune to the crisis.

“The
financial crisis affects each component of a pension system
differently, and while magnitude and timing may be different, each
component is adversely affected,” said Anita Schwarz, main author of
the Report and the World Bank Lead Economist in the Europe and Central
Asia Region. “Sharp falls in output and reduction of the overall tax
base reduced public funds available for pension systems, while at the
same time growing unemployment, drops in wages, and depreciation of
financial assets negatively affected systems financed by worker and
employer contributions.”

 

The new study finds that ECA
countries, once hit with a sudden shock to the fiscal balances of their
pension systems, started considering and implementing policy changes
that both increase resources and cut expenditures. The report warns
policymakers that actions which generate short-term benefits may
involve additional costs in the future. According to one simulation,
even the most severe scenario of the financial crisis pales in
comparison with the effects of the demographic crisis that is looming
in the region.

 

“It is alarming to
look at what the Europe and Central Asian countries are soon to face as
the region continues to age,” said Schwarz. “Future pension system
deficits can be threefold than what is currently expected, and are
expected to remain at that level for more than 20 years before slightly
improving. Policymakers need to use the opportunity of the current
crisis to address long-term issues, which could bankrupt pension
systems precisely when the numbers of people who need them are growing.”

 

Given
the diversity of ECA countries, there is no one blueprint for reforms.
Broadly, the report recommends – depending on the country – a
combination of measures, including moving to inflation indexation of
pensions after retirement, increasing the retirement age and equalizing
the retirement age of men and women, and reducing early retirement.

 

In
addition, it suggests provision of better insurance against the
volatility of financial markets, and calls for the acceleration of
regulatory and supervisory reforms that will allow pension funds to
earn better rates of return along with further development of capital
markets. Finally, it urges governments to promote awareness among their
citizens that public pensions will need to be less generous than in the
past if they are to be sustainable.

You can read the full report by clicking here. There is also a summary of the report available here. I quote the following:

Policymakers need to be cautious that their response to this crisis does not exacerbate the next one.

In
past crises, governments have responded to rising unemployment by
loosening early retirement and disability restrictions. Increased
retirement now will shift the baseline deficits even higher as
potential revenues decline and expenditures rise.
Raising
contribution rates in some types of systems raises liabilities for the
future. Transferring second pillar contributions to the first pillar
also involves an increase in future liabilities for the first pillar.

As
I have stated before, the global pension crisis will unleash a serious
demographic deflationary wave on the global economy. Uncle Ben and
other central bankers are in for a long, tough slug ahead. That’s why
they’re doing everything in their power to spur asset inflation and
hopefully limit the damage as much as they can. I wish them luck,
because when it comes to the pension crisis, they’re truly pushing on a
string.

[Note: Read Tom Croft's comments on dark pools at the end of my last post of seeking alternatives.]

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