Ageing, pension reforms and capital market development in transition countries

This paper gives an overview of demographic trends and their impact on public finances in transition countries. It also describes the pension reforms that have been carried out and the impact of multi-pillar pension reforms on capital market developments. We show that the transition countries face more severe demographic pressures than comparable emerging market economies, and that there is a cause for concern that they may ‘grow old before they grow rich’. Their government finances therefore have to cope with a rising strain on public social security systems. We argue that multi-pillar pension reform is not a cure-all for this problem. Multi-pillar systems are costly to introduce, as pension contributions previously used to finance the public pension liabilities are diverted to the funded pillars. They also change the risk-profile of the pension schemes, as the intergenerational risk-sharing of the public system is replaced by risk-sharing through financial markets. Parametric reform to public pension systems continues to be a viable policy alternative. The necessity of parametric reforms is underscored by data on asset allocations of mandatory pension funds in the transition countries, showing that limited diversification of assets can undermine the actual impact of multi-pillar reform on fiscal sustainability.