The transition from a wholly public,pay-as-you go pension system to one where pensions are alsoprovided by individual, privately managed pension accountsdoes not directly affect those receiving pensions at thetime of the reform. Nevertheless, it could affect allcurrent and future workers. A critical policy choice iswhether these workers should be allowed, encouraged orforced to divert their pension contributions to the newprivate element. The note continues with an in depthanalysis of the spectrum of switching strategies; andfurther, describes the objectives of a successful reform.First, the new scheme should aim to provide a reasonablelevel of retirement income. Secondly, the benefit level mustbe consistent with long-run fiscal policy. The diversion ofpayroll taxes from financing current pay-as-you-go pensionsinto the funded scheme will increase deficits at first, soshort-term fiscal constraints are also important. Thirdly,pension reform has microeconomic objectives: improve theworkings of capital and labor markets. Finally, the reformmust be politically palatable. Some of the note conclusionsare : older workers are best excluded from reforms, becausethere is little time to build substantial funds in the newprivate scheme; a mandatory cut-off age is arbitrary andleads to political or legal challenges; and Governments canand should manage the switching process, by alteringincentives and ensuring people make informed choices.
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