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The role of choice in the transition to a funded pension system

  • Palacios, Robert
  • Whitehouse, Edward

A critical question in the transition to a funded, private pension system is whether the new private element is presented as a mandate or choice to current and future workers. This report sets out the spectrum of available options and looks at policy in 13 reforming countries-Argentina, Bolivia, Chile, Colombia, El Salvador, Mexico, Peru, Uruguay, Croatia, Hungary, Kazakhstan, Poland, and the United Kingdom. It concludes that older workers are best excluded from reform because the economic benefits are small and the political resistance is likely to be large if they are included. However, a defined cut-off age is arbitrary for reasons of intergenerational equity and heterogeneity of portfolio composition and risk preferences within cohorts. A voluntary switch is preferred. The main objection is the resulting uncertainty over the numbers switching. Analysis of reforming countries shows, however, a consistent and rational pattern of switching. The paper concludes by discussing policy options for managing the switching process.

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Paper provided by The World Bank in its series Social Protection Discussion Papers with number 20109.

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Date of creation: 30 Sep 1998
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Handle: RePEc:wbk:hdnspu:20109
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  1. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162 National Bureau of Economic Research, Inc.
  2. Richard Disney & Edward Whitehouse, 1994. "Choice of private pension plan and pension benefits in the UK," IFS Working Papers W94/02, Institute for Fiscal Studies.
  3. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  4. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection Discussion Papers 20048, The World Bank.
  5. Richard Disney & Edward Whitehouse, 1994. "What are pension plan entitlements worth in Britain?," IFS Working Papers W94/01, Institute for Fiscal Studies.
  6. Robert Holzmann, 1997. "Fiscal Alternatives of Moving from Unfunded to Funded Pensions," OECD Development Centre Working Papers 126, OECD Publishing.
  7. Whitehouse, Edward, 1998. "Pension Reform in Britain," MPRA Paper 14175, University Library of Munich, Germany.
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