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The Future of Saving: The Role of Pension System Design in an Aging World – IMF – January 2019

14 March, 2019

This document explores how demographic changes have affected and will affect savings in the public and private sectors, highlighting the interaction between pension systems, labor markets and demographic variables.

According to the report, and in accordance with current policies, public pension disbursements in advanced and emerging market economies will increase by an average of between 1 and 2.5 percentage points of GDP, respectively, by 2050. Without adjustments in taxes and other expenses, this increase will lead to a proportional decrease in public savings. In many advanced economies, younger people will have to save significantly more and postpone retirement for several years to enjoy pension benefits similar to those of today’s retirees. While it has been foreseen that countries with aging and declining working-age populations will experience a more significant decline in national savings than those with younger populations, the design of the pension systems will affect the evolution of savings. Private savings will decline more precipitously in countries with generous public pension systems, since people will depend less on their own savings when they retire. All other things being equal, private savings are expected to increase in countries that include a defined contribution scheme in their pension systems.

The findings of this report pose important policy considerations: (i) Promoting private retirement savings and mitigating fiscal vulnerabilities in the long term will require further reforms of public pensions in many emerging markets and advanced economies, but the reforms should be carefully calibrated to avoid undermining the well-being of future retirees or begetting poverty in old age; (ii) countries with propitious macro-economic and legal environments and insufficiently developed financial systems could consider the possibility of supplementing the public pension plan with a funded defined-contribution plan, which would provide a vehicle for promoting private savings; (iii)  financial sector and labor market policies must be considered part of any pension reform package. The ability of households to save for retirement and diversify the risks associated with retirement will depend on the availability of a wide range of relevant financial products. Labor market policies should be aimed at encouraging the participation of older workers, bridging gender gaps and addressing informality.

 

 

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