A Global Policy Laboratory: Reforming Pensions in Developing and Transition Countries (Research and Policy Brief)

Pension reform has been something of a global policy laboratory over the last three decades. UNRISD research on the drivers of pension reform and the diversity of models and outcomes provides evidence to undermine three of the most unhelpful myths around pension reform, showing that privatization is not a silver bullet; declared blueprints for reform are not in fact suitable for all country contexts; and policy space can be regained to reform pension systems for the better.

Over the last three decades, pension systems have seen a wide variety of reform models, processes and outcomes. In the 1980s, with neoliberalism and structural adjustment came a slew of welfare state retrenchment policies, but reform pathways differed substantially in developed countries on the one hand, and in developing countries and those countries that switched from central planning to market economies (transition countries) on the other.

While pension reforms in Western Europe and developed welfare states remained quite moderate, a paradigmatic change from state-based systems to privatized, market-led models took place in over 30 developing and transition countries. Public pay-as-you-go (PAYG)–financed systems based on an intergenerational contract administered by the state were replaced by privately managed fully funded pensions—a model first tested in Chile in 1981 and developed into a universal reform blueprint by powerful actors such as the World Bank and other aid agencies. Pension privatization was promoted as an instrument to foster growth and to minimize the adverse impacts of ageing on public budgets. It was also seen as a possibility to overcome a perceived reform impasse in many countries where governments met with political resistance when aiming to cut pension entitlements to reduce fiscal costs.

Although much emulated, the Chilean privatization model was not the only game in town. Many countries, whether developed, developing or in transition, have quietly pursued different reform options. None of the more developed countries actually privatized their pension systems, although most European countries introduced some more moderate pension reforms in the 1990s and 2000s in response to changes in demographics and labour markets, and because of austerity pressures emerging from the economic and financial crisis in 2008.

In the global South, reform models have also been far from uniform. Regions such as the Middle East and North Africa (MENA) have not introduced any major pension reforms, despite a range of persistent problems such as coverage gaps, inequities in highly fragmented systems and rising fiscal costs. Latin America, the region that originally spearheaded the privatization model, has more recently focused subsequent reforms on expansion of coverage and poverty reduction mainly through non-contributory social pensions. And the BRICS (Brazil, Russia, India, China and South Africa) as well as the Republic of Korea have seen a wide variety of approaches, ranging from reforms of their civil servant pension schemes, to partial privatization, to the extension of non-contributory pension benefits.

The project on which this brief is based analysed the specific context and objectives of pension reforms, as well as the national and international reform drivers, in 11 case study countries to try and explain this diversity of reform approaches and models. Researchers also assessed the actual or likely economic, social and institutional impacts of reforms in order to identify where there were successful reforms from which lessons can be learned, and where further reform is still needed.

This Research and Policy Brief was prepared by Katja Hujo with editorial guidance from Joannah Caborn Wengler.

UNRISD Research and Policy Briefs aim to improve the quality of development dialogue. They situate the Institute’s research within wider social development debates, synthesize its findings and draw out issues for consideration in decision-making processes. They provide this information in a concise format that should be of use to policy makers, scholars, activists, journalists and others.