Voluntary pensions in emerging markets

As the world’s population ages, promoting long-term savings to ensure retirement security is becoming increasingly urgent.

This is especially true in today’s emerging markets. Informal-sector workers, who have typically not participated in state pension programs, have always had to worry about poverty in old age. But now formal-sector workers are also struggling to achieve retirement security. In emerging markets with pay-as-you-go pension systems, governments are being forced to make reductions in future retirement benefits due to declining birthrates and rising life expectancy. Although emerging markets with funded state pension systems are better insulated from the impact of their aging populations, contribution rates are too low to generate adequate replacement rates.

Meanwhile, rapid development and rapid demographic change are putting increasing pressure on alternative sources of retirement income, especially the extended family. Without reform, a large share of the workforce in most emerging markets will reach old age over the next few decades without adequate pensions, personal savings, or children to support them.

Building robust voluntary pension systems

Voluntary Pensions in Emerging Markets: New Strategies for Meeting the Retirement Security Challenge, a research report by the nonprofit Global Aging Institute, argues that the success of emerging markets at ensuring retirement security will increasingly depend on their success at building robust voluntary pension systems. To identify best practices, the report reviews the experience of the developed countries, where voluntary pensions are much better established than they are in the developing world. It then describes how the lessons learned from developed-country experience can best be applied in the very different economic, social, and institutional environment in emerging markets, focusing in particular on eight Asian and Latin American countries: Brazil, Chile, China, Hong Kong, India, Malaysia, Mexico, and Thailand.

According to the Global Aging Institute report, reform will have to proceed on several fronts at once:

  • Governments will need to broaden and deepen existing voluntary pension systems for formal-sector workers that now serve just a privileged minority of the labor force.
  • Along the way, governments should prioritize the development of occupational pension systems.
  • At the same time, governments will need to build entirely new voluntary pension systems tailored to the needs of informal-sector workers, who currently enjoy little or no retirement security at all.

The choice facing policymakers

Although reform will entail a significant fiscal cost, that cost will be far less than the cost of inaction.  Policymakers in emerging markets face a choice. They can invest in building robust voluntary pension systems that will shore up the incomes of tomorrow’s retirees, take pressure off government budgets, and reduce income inequality.  Or they can stand by as the gathering retirement crisis unfolds.

For too long, emerging markets have focused on trying to expand the coverage of mandatory pension systems, usually unsuccessfully, while promoting voluntary pensions has been almost an afterthought. It is time to recognize that, in societies where the reach of mandatory pension systems is so limited and populations are aging so rapidly, voluntary pensions are an essential component of retirement security.

Download the report