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Expanding Pension System Coverage. Developing Rural Pension Systems Axel Weber Social Protection Specialist. Objectives of the Presentation. To clarify: Pensions in Asia – it is possible! To describe: Experiences of others To analyse: Technical possibilities of rural pensions
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Expanding Pension System Coverage Developing Rural Pension Systems Axel Weber Social Protection Specialist APFD Workshop 16-17 October 2007
Objectives of the Presentation • To clarify: Pensions in Asia – it is possible! • To describe: Experiences of others • To analyse: Technical possibilities of rural pensions • To alert: The political agenda APFD Workshop 16-17 October 2007
Structure • Facts and Data • The need for more coverage • The possibilities for Extension • Examples of coverage • How to Extend Coverage - Techniques • Policy issues APFD Workshop 16-17 October 2007
Facts and Data APFD Workshop 16-17 October 2007
Facts and Data Source: World Population Prospects, 2006 revision. UN 2007 APFD Workshop 16-17 October 2007
Facts and Data APFD Workshop 16-17 October 2007
The Need for Coverage APFD Workshop 16-17 October 2007
The Need for Coverage- need for pensions - • Changing family structures - migration • Large informal sectors without protection • Traditional farmers • Self-employed workers like small shops • Employed people without security • People have not enough savings • Jobs for elderly may diminish • Governments may not be willing to pay APFD Workshop 16-17 October 2007
The Need for Coverage- Informal sector - Issues • Majority of people work in IS • Absence of social security • Retirement, Pension and health insurance a luxury • Most of the elderly are working (for example Indonesia 81% of male and 41% of female) Targets • To build up entitlements • To protect elderly workers and their families • To prevent widespread poverty • To avoid social dumping APFD Workshop 16-17 October 2007
The Need for Coverage- Pensions - • Pensions are important • Smoothen consumption • Prevent old age poverty • Support economic stability • Pensions are possible • More GDP means more fiscal space • Technological progress allows redistribution • Indirect instead of direct taxes broaden assessment base and avoid reduction in competitiveness APFD Workshop 16-17 October 2007
Extension of Coverage APFD Workshop 16-17 October 2007
Extension of Coverage - Issues - • Is Social Protection Affordable? • ILO study proves: all countries can afford • Strong growth means fiscal space • Is Social Protection good for the Economy? • Stabilizes demand • Allows individuals to take risks • Shifts responsibilities from families to risk communities • Prevents poverty • Money is not „lost“ and creates demand. If there are pensions, just other people use it. • Effects on competitiveness depend on financing mechanisms APFD Workshop 16-17 October 2007
Extension of Coverage - ADB Social Protection Index - Preliminary Results. Four Indicators: • Social protection expenditure – as % of GDP. • The total number of beneficiaries of Social Protection programs – SP coverage. • The number of poor beneficiaries of SP programs – SP Distribution. • Social protection expenditure going to the poor – SP Impact. APFD Workshop 16-17 October 2007
Extension of Coverage- ADB Social Protection Index - APFD Workshop 16-17 October 2007
Extension of Coverage- ADB Social Protection Index - APFD Workshop 16-17 October 2007
Examples of Coverage APFD Workshop 16-17 October 2007
Examples of Coverage- Pensions - Source: Help Age International 2007 APFD Workshop 16-17 October 2007
Examples of Coverage- Pensions - Source: Help Age International 2007 APFD Workshop 16-17 October 2007
How to Extend Coverage APFD Workshop 16-17 October 2007
How to Extend Coverage- problems - • Rural sector less densly populated • Less infrastructure • Less regular income • Large informal sector • Low literarcy and low awareness • No identification and high mobility • Less access to capital markets • Low pensions face high adminitration costs • People do not trust • More difficult to administer pensions APFD Workshop 16-17 October 2007
How to Extend Coverage - alternatives - • Universal non contributory flat rate pension – means tested or not • Volutary contributory funded pension • Compulsory contributory • PAYG • Funded APFD Workshop 16-17 October 2007
Advantages Everybody is covered Easy to administer Guarantees universal protection Disadvantages No link to contributions Gives a free pension also to those who do not need it How to Extend Coverage - flat rate pensions - APFD Workshop 16-17 October 2007
Advantages Link to contributions Less budgetary implications Disadvantages Poor cannot afford High administrative challenge Underestimation of need by people No solution to poverty How to Extend Coverage - voluntary contributory - APFD Workshop 16-17 October 2007
Advantages Everybody is covered More solidarity effects possible Disadvantages Difficult to enforce Political resistance How to Extend Coverage - compulsory contributory - APFD Workshop 16-17 October 2007
Advantages High surpluses in building – up phase No capital market needed Easy to administer Disadvantages Higher contributions with aging Needs mechanism to prevent erosion Benefits not defined How to Extend Coverage - PAYG contributory - APFD Workshop 16-17 October 2007
Advantages Not sensible to aging Accumulates capital Benefits are defined (within limits) Disadvantages Needs capital market Benefits depend on fund management Higher administration costs How to Extend Coverage - funde schemes - APFD Workshop 16-17 October 2007
How to Extend Coverage - how to reach rural population - • To involve communities and extend to communities • To do social marketing • To do low cost administration • To create synergy effects with other public administration • To create synergy effects with other products like microfinance APFD Workshop 16-17 October 2007
How to Extend Coverage - risks - • Mismanagement of funds • Fraud • Policy risks and Government risks • Loss of information and contact risk • Insolvency risk • Discontinuation and drop out risk APFD Workshop 16-17 October 2007
Policy Issues APFD Workshop 16-17 October 2007
Policy Issues • „Society for all Ages“ must be discovered • Awareness must be created that Social protection is affordable! • Schemes must be built up and reformed • To pay to every person over 65 in China a pension of 2$ a day costs 2% of GDP APFD Workshop 16-17 October 2007
Thank You APFD Workshop 16-17 October 2007
Sources • World Population Prospects, 2006 revision. UN 2007 • The retirement project: Urban Institute 2000 • Aging in Asia. The growing need for social protection. ILO 2000 • Help Age International 2007 • ADB Social Protection Index Project APFD Workshop 16-17 October 2007