Pension reform: What the debate is about*

• Published date: 01 June 2000
• Date: 01 June 2000
• DOI: http://doi.org/10.1111/j.1564-913X.2000.tb00410.x

Perspectives 197

Copyright © International Labour Organization 2000

International Labour Review, Vol. 1 39 (200 0), No. 2

P E R S P E C T I V E S

Pension reform: What the debate is about *

Pension reform1 has become a widespread concern — for reasons that

differ from one country to another: most developed countries’ pension schemes

have been in operation for decades; the so-called transition countries have had

to overhaul their entire social syst ems; and some of the developing count ries

are just on the t hreshold of establishing old-age pension schemes. Polit icians,

journalists and interest groups have come up with piecemeal suggestions for

reform. Often p resented as “i nescapable”, th eir prescrip tions, h owever, have

had the unfortunate effect of oversimplifying what essentially remains an enor-

mously complex problem.

An idea of its complexity can be gained from the r eaction of French de-

mographer Hervé Le Bras to a United Nations Popul ation Division report ,

according to which the developed countries — particularly those of Europe —

will need a massive influx of imm igrants to offset the effects of population

decline and ageing (United Nations, 2000). This argument, Le Bras explains, is

based on the assumption that “the status quo can be maintained indefinitely

with the exception of a few figures and ratios that are believed to be in need of

— and amenable to — adjust ment”. He then goes on to ask:

What wil l productivity be like in 2050? Will pensions schemes that were

mostly in troduced some 50 years ago still be in operation in another 50? Is it

not more likely that t hey will have been replaced by f lexible arrangements

for distributing working time over a lifetim e? What will be the meaning of

work itself if c omputerization and communicatio ns systems continue to de-

velop at the same giddy pace? S ince 1936, the amoun t of time people spend

working over their lifetime has been halved. Where will things stand in 2050

when life expectancy for adults wi ll have doubled? What is there to suggest

that the p ay-as-you-go system — on which the United Nations’ thinking is

premised — will not have been replaced by forms of f unding linked to capital

growth? (Le Bras, 2000).

* This “Perspective” was written by P atrick Bollé, French-language editor of the Interna-

tional L abour Review.

1Though social se curity systems or pension fun ds o ften pay out o ther benefits (e.g.

disability pensions or survivors’ benefits) , this perspectiv e is concerned solel y wi th old-age

retirement pensions.

International Labour Review198

Such questions show just how many variables have to be taken into considera-

tion and, wh at is mo re, projected over several decades. The debate over pen-

sions is also highly sensitiv e: against a background of great uncertainty about

those vari ables, hard decisions need to be taken that will affect not only the

current and future position of people at work today, but also that of generations

to come.2

This “perspective” tries to clarify the basic issues at stake in this complex

debate. Its aim is to help readers avoid the pitfalls of oversimplification and see

through economically or pol itically motivated assertions, however categorical

they may sound. It begins by outlini ng the main features of the different types

of pension scheme. Then, after highlighting t he importance of demographic

factors, it turns to t he implications of popu lation ageing for th e alternative

options of pay-as-you-go (PAYG) vs. fully funded schemes. The perspective

concludes with a presentation of the principles and approach of the IL O.

Pension scheme classification criteria

There are two broad types of social protection for the elderly. The first

comprises benefits that are available t o everyone, either universally or subject

to a means test. Such benefits are financed from general state revenue and

constitute a fo rm of social assistance (a social f loor). The second type i s an

entitlement restricted to people wh o — together with their employers or inde-

pendently — contributed to a pension fund during their working life. S uch

protection is in the nature of social insurance.

Aside from this basic distinction, pension schemes also differ dependin g

on how they are organized, their conditions of entitlement to benefits and their

outcomes.

Different forms of organization

How pensi ons schemes are organized basically depends on four sets of

alternative pol icy opt ions, namely, PAYG v s. full y funded schemes, defined

contributions vs. defined benefits, public vs. private administration, and m an-

datory vs. voluntary participation. Current or planned reforms typically consist

in shifting from one of those options to anot her. The situation is fu rther com-

plicated by the fact that national pension schemes are often structured around

several components — or “pillars” — which do not necessarily follow the same

rules (see McGillivray, 2000, pp. 5-6).

Pay-as-you-go vs. funded schemes. This is p robably the m ost widely de-

bated choice (t he issues at stake will be di scussed below). In PAYG schemes,

the retirement pensions paid out ov er a given period are financed from the

2The ILO has just published an impressive tome on social security pension schem es

(Gillion et al., 2000), which is presented in the “Books” section of this issue of the International

Labour R eview (Vol. 139, No. 2).