There is a widespread perception thatpublic pension systems in richer countries are in crisis. Asschemes mature and the population ages, the burden offinancing pensions has grown and, on current policies, willrise much further. Developing countries are younger andpension systems relatively immature. But the transformationin demographics and pension benefits that took over acentury in richer nations is forecast to take less than 30years in developing economies. The Bank has argued that a'three-pillar' pension system can mitigateemerging problems in developing countries' publicpension systems. The recommended system, set out in Avertingthe Old Age Crisis consists of 'a publicly managedsystem with mandatory participation and the limited goal ofreducing poverty among the old; a privately managedmandatory savings system; and voluntary savings'. Thenote compares funded and pay-as-you-go finance of retirementincomes, highlighting the transition double burden, and,stipulates size of the transition will depend on thestarting point:How generous is the current pay-as-you-gopension promise?How mature is the pay-as-you-go pensionsystem?What is the age structure of the population?Transition costs can be controlled by a number of policies:Limiting the coverage of the funded program to newlabor-market entrants or younger workers spreads thetransition cost over a longer period; Scaling down existingpay-as-you-go liabilities is likely to play an importantpart in any fundamental pension reform; Governments canshare in any extra returns to the funded system and use themto help pay for the transition cost. Countries have inpractice used a mix of strategies. The precise balancebetween debt and budgetary finance (spending cuts or taxincreases) should be chosen in the general context of acountry's fiscal policy.
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