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Income security for old age : conceptual background and major issues

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  • James, Estelle
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    A large and growing proportion of the world's population is old; the elderly are often poor; and many countries face huge fiscal burdens because of promises they have made to give their older citizens income security. These government old-age security policies have been debated in developed countries for years; more recently they have also become a matter of concern in developing countries. The author identifies the issues countries should consider as they reevaluate their old policies and formulate new ones. The structural differences among available models for providing old-age security involve: The link between benefits and costs to each individual, which is closely tied to the plan's objectives (for example, savings and insurance versus redistribution). Whether the schemeis funded largely in advance or whether it is financed on a pay-as-you-go basis. How much the scheme relies on private or public management. The choice between these models has broad implications for the operation of labor and capital markets, the fiscal system, and thus the level, growth, and distribution of GNP. The author examines the working hypothesis, that a system built on several pillars is preferable to any single method for providing old-age security - a mixed strategy is the best way to accomplish many goals with minimum costs, including evasionary, distortionary, and uncertainty costs. Of four pillars, one mandates savings and annuities, so that people are required to set aside resources during their working years to take care of their needs when they are older. This pillar also ensures against such individual risks as uncertain longevity. Another redistributes income to old people who did not earn enough when they were young to build an adequate cushion of savings. This pillar may also ensure more broadly against such group risks as unexpectedly high inflation or unexpectedly low rates of return in the economy. The third provides fiscal incentives for nonmandatory savings and annuities, such as tax incentives for job-based pension plans. And the fourth consists of purely voluntary personal savings and family arrangements, a continuation of the informal system of old-age security that remains important in most countries even after formal systems are in place. The mix of these pillars will vary from country to country, depending on their objectives and economic conditions. The author evaluates the impact of different mixes on the distribution of costs and benefits and discusses the difficulties of making the transition from one system to another. She outlines a forthcoming study that will analyze important design features of each system, such as conditions for eligibility and coverage, methods of financing, formulas for benefits and contributions, and provisions for indexing and early retirement. The study will also propose reforms for existing public plans that have become financially nonviable.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 977.

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    Date of creation: 30 Sep 1992
    Handle: RePEc:wbk:wbrwps:977
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