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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.

Suggested Citation

  • Palacios, Robert & Whitehouse, Edward, 1998. "The role of choice in the transition to a funded pension system," Social Protection and Labor Policy and Technical Notes 20109, The World Bank.
  • Handle: RePEc:wbk:hdnspu:20109

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    References listed on IDEAS

    1. Whitehouse, Edward, 1998. "Pension reform in Britain," Social Protection and Labor Policy and Technical Notes 20053, The World Bank.
    2. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 1-19.
    3. Richard Disney & Edward Whitehouse, 1994. "What are pension plan entitlements worth in Britain?," IFS Working Papers W94/01, Institute for Fiscal Studies.
    4. 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.
    5. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection and Labor Policy and Technical Notes 20048, The World Bank.
    6. Robert Holzmann, 1997. "Fiscal Alternatives of Moving from Unfunded to Funded Pensions," OECD Development Centre Working Papers 126, OECD Publishing.
    7. Holzmann, Robert, 1997. "On economic benefits and fiscal requirements of moving from unfunded to funded pensions," Financiamiento para el Desarrollo 48, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. 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.
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    Cited by:

    1. Robert Jahoda & Jiøí Špalek, 2009. "Pension Reform through Voluntary Opt-Out: The Czech Case," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 309-333, Oktober.
    2. Whitehouse, Edward, 2000. "Pension reform, financial literacy and public information: a case study of the United Kingdom," MPRA Paper 10323, University Library of Munich, Germany.
    3. Whitehouse, Edward, 2000. "Administrative charges for funded pensions: An international comparison and assessment," MPRA Paper 14172, University Library of Munich, Germany.
    4. Schröder, Carsten, 2012. "Profitability of pension contributions – evidence from real-life employment biographies," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(03), pages 311-336, July.
    5. Reece, Christopher & Sam, Abdoul G., 2012. "Impact of Pension Privatization on Foreign Direct Investment," World Development, Elsevier, vol. 40(2), pages 291-302.
    6. Whitehouse, Edward, 2000. "Paying for pensions: An international comparison of administrative charges in funded retirement-income systems," MPRA Paper 14171, University Library of Munich, Germany.
    7. Holzmann, Robert, 1998. "Financing the transition to multipillar," Social Protection and Labor Policy and Technical Notes 20052, The World Bank.
    8. Robert Holzmann & Robert Palacios & Asta Zviniene, 2001. "On the Economics and Scope of Implicit Pension Debt: An International Perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(1), pages 97-129, March.
    9. Richard Disney & Robert Palacios & Edward Whitehouse, 1999. "Individual choice of pension arrangement as a pension reform strategy," IFS Working Papers W99/18, Institute for Fiscal Studies.
    10. Andrews, Emily S., 2001. "Kazakhstan : an ambitious pension reform," Social Protection and Labor Policy and Technical Notes 23156, The World Bank.
    11. Disney, Richard & Whitehouse, Edward, 1992. "The personal pensions stampede," MPRA Paper 10476, University Library of Munich, Germany.
    12. Roy Allen & Norman Bedford & András Margitay-Becht, 2011. "A “human ecology economics” framework for Eastern Europe," International Journal of Social Economics, Emerald Group Publishing, vol. 38(3), pages 192-208, February.
    13. Acuna R., Rodrigo & Iglesias P., Augusto, 2001. "Chile's pension reform after twenty years," Social Protection and Labor Policy and Technical Notes 24079, The World Bank.
    14. Ashok Thomas & Luca Spataro, 2013. "Pension funds and Market Efficiency: A review," Discussion Papers 2013/164, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    15. Chlon, Agnieszka, 2000. "Pension reform and public information in Poland," Social Protection and Labor Policy and Technical Notes 23142, The World Bank.
    16. Estelle James & Alejandra Cox Edwards, 2005. "Do Individual Accounts Postpone Retirement: Evidence from Chile," Working Papers wp098, University of Michigan, Michigan Retirement Research Center.
    17. Demarco, Gustavo & Rofman, Rafael & Whitehouse, Edward, 1998. "Supervising mandatory funded pension systems: issues and challenges," MPRA Paper 16348, University Library of Munich, Germany.

    More about this item


    Debt Markets; Pensions&Retirement Systems; Emerging Markets; Gender and Law; Labor Policies;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance


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