Ninety per cent of World Excluded from Old Age Pension Schemes

The ILO estimates in new publication that some 90 per cent of the world's working-age population is not covered by pension schemes capable of providing adequate retirement income.

Press release | BANGKOK | 28 April 2000

BANGKOK (ILO News) Some 90 per cent of the world's working-age population is not covered by pension schemes capable of providing adequate retirement income, the International Labour Office (ILO) says in a new publication: Social Security Pensions: Development and Reform.*

Bad management of many existing schemes makes matters worse and leaves much of the world's population exposed to the risk of poverty in old age, observes Colin Gillion, Director of the ILO's Social Security Department and editor of the book.

The ILO sees old-age pensions as a responsibility of the State: the stability they give workers is a mainstay of properly functioning labour markets and healthy economies.

Asia and the Pacific

In Thailand, where only one worker in five belongs to the State pension scheme, a major objective of the Government is to extend coverage to all workers, notably home-based workers and people working in small enterprises.

Old-age pensions were first introduced in Thailand in 1998 under the Social Security Act of 1990. Benefits will not be paid until 2013, at which time the earliest members of the scheme will have completed the qualifying period.

As in many other countries throughout the world, Thailand's pension scheme has a steadily ageing population to serve. Thirty years ago there were 17 working people for every Thai over the age of 65. The ILO expects that by the year 2030 there will be only 13 working people for each over-65 person.

Still, the problem of ageing remains far less acute in Thailand than in most OECD and middle-income countries. Japan, with the largest proportion of over-65s in the world, had a population with 13 workers for every over-65 as long ago as the early 1960s.

The graying of Thailand's population precludes reliance on the extended family to meet senior citizens needs.

Funded pension schemes in many parts of Asia were hard-hit by financial turmoil, due in part to excessive government regulation of national financial systems.

Singapore and South Korea currently have the best managed schemes in Asia, Mr. Gillion says. They are financially viable with good compliance and performance indicators.

One striking feature of this region is the large number of countries that maintain provident funds, often a holdover from the colonial period, rather than mandatory pension schemes. A provident fund which normally pays out one lump sum upon retirement rather than a fixed monthly payment over a lifetime does not fulfill the same function as a pension scheme as it does not provide a replacement income for the length of the retirement.

The Republic of Korea, the Philippines, Thailand since 1998 and Viet Nam all run social insurance pension schemes for employees and in some cases the self-employed too.

China is working hard to adapt its pension system to the needs of an alarmingly ageing population.

Fifty years after gaining independence, India recently set up a social insurance pension scheme.

Pakistan opted for a social-insurance pension scheme in the 1970s.

General findings

Social Security Pensions: Development and Reform was published to coincide with May Day 2000, the global holiday that celebrates the contributions of working people to society.

Among the book's findings are:

$ Pension schemes in countries of the former Soviet Union have become practically worthless with the collapse of national economies;

$ In general, pension schemes in Africa are very weak and badly managed;

$ Pension schemes in Asia have been weakened by the continent's financial turmoil of the late 1990s;

$ Retirement schemes in Arab States of the Middle East are relatively young and face major problems in dealing with the high percentage of foreign workers who are not permitted to join the schemes;

$ Many retirement schemes in Latin America and the Caribbean are performing poorly, with at least eight countries converting their schemes to different systems.

The report identifies five main causes for failure of pension schemes in developing and reforming countries to provide wide coverage:

$ In many developing countries, the majority of people work in the informal sector or in rural regions that provide few or no benefits or worker protection of any kind;

$ Employees in small companies with 10 or less employees are often excluded from participation in social security pension schemes;

$ Many pension schemes in existence are badly managed, with the consequence that they have overly high administrative costs and do not deliver benefits when they should;

$ Many schemes are unable to collect contributions from all the people that should pay into them, which leads them into financial deficit;

$ Many schemes are based on weak and unregulated financial systems and may be open to corruption.

The ILO is working with middle income and developing countries to develop pension schemes or to reform existing schemes. These countries include: China, Indonesia, Madagascar, Morocco, Panama, Philippines, South Africa, Thailand, Tunisia, Turkey, Ukraine, Uruguay, Vietnam, several Central European countries, and several Caribbean countries.

The search for a new balance

The ILO study makes specific recommendations on how countries can increase the percentage of protected workers and improve benefits for everyone.

The ILO says that all countries should adopt the goal of extending coverage to all members of the population. Other desirable goals include instituting schemes that protect not only against poverty in old age, but also against disability and benefits for the family in case the wage earner dies; adjustment of retirement income to take account of inflation and a general rise in living standards; development of additional voluntary provisions for retirement income.

The most crucial challenge is extending even minimal old-age retirement benefits to the hundreds of millions of workers in the informal sector. In Africa, upwards of 90 per cent of the workforce are engaged in informal, small-scale and often subsistence-level activities with little or no social protection. In Latin America, the informal sector is the only part of the labour market that is growing, accounting for 80 per cent of all new jobs created.

Among the ILO recommendations to extend coverage to this vast and growing sector are: modification of existing schemes to cover excluded groups; designing special schemes for excluded groups; introducing tax-based, universal or targeted anti-poverty schemes; and encouraging the development of special schemes based on self-help among people in the informal sector.

The ILO emphasizes the need to improve management and governance of existing pension funds by involving workers and employers in the process. It says that compliance in nearly all schemes needs improvement. Ensuring this remains the responsibility of governments.

The ILO also says that countries should take many ideas into consideration before raising the age of retirement. The ILO warns that by raising the retirement age, older workers will then need better disability and unemployment benefits.

The ILO recommends that countries avoid trying to develop a single perfect retirement system. All countries need to develop pluralistic designs and flexible structures for their social security schemes, the book says.

Diversifying risk

Even where coverage in nearly universal and schemes are well managed, as in the advanced industrialized countries of the Organization of Economic Cooperation and Development (OECD) mainly North America, Western Europe, Japan and Australia major problems in financing pensions will arise in coming years as populations age and as countries seek to diversify the risk to individuals, the book says.

OECD countries already spend an average 10 per cent of their Gross Domestic Product (GDP) on old-age retirement benefits, which exceeds their total spending on health care, says Colin Gillion. With that number rising, Mr. Gillion says that OECD pension plans are generally excellent, but expensive. The best way to deal with ageing populations is to increase the actual age of retirement and to increase the number of women in employment.

The ILO study finds that the US pension system and to a lesser extent, the system in the United Kingdom carries more risk for its members than those of West European countries, because the US and UK systems rely more heavily on occupational- and privately-funded schemes rather than complete government financing.

The ILO study is also cautious about one of the most fashionable panaceas for helping these pension schemes meet future needs investing funds in financial markets. According to Colin Gillion, Investing in financial markets is an uncertain and volatile business: under present pension plans people may save up to 30 per cent more than they need which would reduce their spending during their working life; or they may save 30 per cent too little which would severely cut their spending in retirement. Which way round cannot be foreseen at the beginning of a working life.

The ILO says that an option for the United States might be to increase the Social Security contribution from workers and employers: Raising the contribution rate by one or two percentage points, or even better, by planning further increases in the actual age of retirement, would solve most of the deficit problems far into the future for Americans, Mr. Gillion says.

Many OECD countries have legislated increases in the age for early retirement in an attempt to encourage workers to delay leaving their jobs. A number of countries have reduced benefits by increasing the years used in the earnings averaging period, reducing the adjustment for cost-of-living increases for retirees, or requiring more years of work to qualify for certain benefits.

However, this sort of fine-tuning of eligibility and retirement age is a luxury most countries cannot afford. It is one which is politically difficult to achieve, and which can strain the basic social consensus underlying pension schemes.

The lack of more complete pension coverage throughout the world will become a growing problem as lifetimes are extended and the importance of traditional extended family units, which once provided old age protection, diminishes, says Mr. Gillion.

Rise of pension schemes

When the 20th century began, few workers had the security of an old age pension. In developed countries, most people either died early or worked until they were in their late 60s, spent a brief retirement living with their children, then died in their early 70s. To be old generally meant to be poor. Becoming disabled signified that poverty began earlier.

For developing and middle-income countries, older people faced much worse prospects. Incomes were substantially closer to subsistence levels and the capacity of children to support their parents was less. Death came earlier, and the famous expression applied more: A Life was nasty, brutish and short.

By the beginning of the 21st century, the situation has dramatically changed. In developed countries, the incidence of poverty in old age is now comparable to levels in the remainder of the population. Life expectancy is longer and most workers can expect a significant period of retirement with a reasonable income.

Disability pensions and the possibility of early retirement have reduced the financial risks of incapacity to work. Almost all women are entitled to a survivor's pension, and a growing majority are entitled to a pension as workers in their own right.

Alongside these changes, an increasing number of developing countries are beginning to emulate the experience of the developed countries, in terms of the extension of coverage and in the improvement of benefits.

A large part of this profound improvement in social conditions can be attributed to the creation of social security pensions that must be counted as one of the great social developments of the last 100 years. Pensions accelerated in the second half of the 20th century, after growing hesitantly in the first half of the century. Pension outlays in the developed countries grew at twice the rate of gross domestic production (GDP), and more and more developing countries and middle-income countries attempted to provide benefits for retirees.

The task is only half complete, the book shows. Pension schemes throughout the world are in a state of upheaval. On the one hand, the developed countries are contemplating new architectures for the financing of pension outlays. This will require careful thought and the development of a new consensus. But on the other hand, the overwhelming majority of the world's population is still without some form of income security in old age or disability.

* Social Security Pensions: Development and reform, edited by Colin Gillion, John Turner, Clive Bailey and Denis Latulippe.   International Labour Office, Geneva, 2000.  ISBN 92-2-110859-7.    Price: 120 Swiss francs.