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Sequencing social security, pension, and insurance reform

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  • Vittas, Dimitri

Abstract

For both economic and regulatory reasons, most developing countries have underdeveloped pension funds and insurance sectors, and their social security systems face many financial and organizational problems. Wide-ranging reform would produce considerable economic and social benefits. A restructured social security system would avoid financial involvency and be better able to meet its objectives of redistribution. The development of pension funds and insurance business would generate long-term financial resources that could stimulate the growth of capital markets and might help provide adequate, affordable long-term benefits to members and policyholders. The main objectives of an ambitious reform program should be to: a) prevent the insolvency of the social security system (a longer run problem for developing countries with young populations) and thus ensure adequate but affordable, sustainable pension generate long-term financial resources that could stimulate the growth of capital markets and might help provide adequate, affordable long-term benefits to members and policyholders. The main objectives of an ambitious reform program should be to: a) prevent the insolvency of the social security system (a longer run problem for developing countries with young populations) and thus ensure adequate but affordable, sustainable pension benefits; b) remove incentives that encourage the strategic manipulation, and hamper the efficient functioning, of labor markets; c) control the occurrence of perverse, capricious redistribution by removing the many design faults that afflict security systems in most developing countries; and d) generate long-term financial savings that can help stimulate the modernization and growth of capital markets, finance long-term investments, and facilitate privatization. Although there is no single optimal way to sequence and pace a reform program, the full benefits of reform will not be realized until social pension systems are restructured and downsized, contribution rates lowered, and the scope for private pension funds (whether voluntary or mandatory) increased. One often-ignored imperative is to defer indexing the pension system until its many design flaws are corrected. Finally, reform of the insurance sector is essential for the whole program to succeed, because of the close links between pension reform and the provision of life, disability, and annuity insurance services.

Suggested Citation

  • Vittas, Dimitri, 1995. "Sequencing social security, pension, and insurance reform," Policy Research Working Paper Series 1551, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1551
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    References listed on IDEAS

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    1. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. "Pensions systems and reform : country experiences and research issues," Policy Research Working Paper Series 1470, The World Bank.
    2. Fox, Louise, 1994. "Old age security in transitional economies," Policy Research Working Paper Series 1257, The World Bank.
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    Cited by:

    1. Riboud, Michelle & Hoaquan Chu, 1997. "Pension reform, growth, and the labor market in Ukraine," Policy Research Working Paper Series 1731, The World Bank.
    2. Yan Wang & Dianqing Xu & Zhi Wang & FanZhai, 2001. "Implicit pension debt, transition cost, options, and impact of China's pension reform : a computable general equilibrium analysis," Policy Research Working Paper Series 2555, The World Bank.

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