Economics and finance, Government and governance | The World

25 November 2020

Robust pension policies are crucial for safeguarding political and social stability in a rapidly ageing and changing world, Odusote Fatimah Abolanle and Alfred Muluan Wu write.

With the COVID-19 pandemic grinding almost every sector of the global economy to a standstill, many governments have had to reform policy to buffer the health and economic shocks their citizens are going through, including pensions and social security.

This unprecedented paradigm shift has exposed existing gaps in pension policies. Although some principles related to pensions, namely adequacy and sustainability, have been widely acknowledged, difficulties have been lingering around the direction of pension reforms amidst this unprecedented challenge.

Governments across the region should be careful about making changes to pension systems in the wake of the pandemic’s heights.

In general, pension schemes are intended to provide consumption smoothing, insurance, and poverty relief for the elderly. In essence, they serve as income security for older people, and prevent poverty and reduce inequality in later life. Pension systems go beyond offering protection to senior citizens but also serve to reduce the financial burden on the governments, in particular in health and aged care.

Intriguingly, global pension systems have undergone significant transformation and adaptation, and most pensions have evolved.

The most recent wave of pension reform started from Latin America and Eastern Europe, and gradually diffused to other parts of the world. The wave saw a shift from defined benefit, pay-as-you-go (PAYG), publicly administered pensions to a privately managed, defined contribution systems.

However, this is just one solution. While the World Bank and the International Labour Organization have proposed their own models, the kind of pension system applicable in different nations should ideally depend on social and cultural factors, and the unique composition of a country’s citizenry and workforce.

Hence, pension systems ought to vary from country to country, and be uniquely tailored to achieving the intended objectives of a government while also abiding by the overall principles of adequacy, sustainability, and integrity.

The COVID-19 pandemic has complicated pension reforms in many countries. Worse yet, recent reforms in some countries put them at risk of further harm in the event of a another catastrophe like COVID-19.

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For instance, a recent wave in pension schemes in many regions of the world shifted the risk and financial burden to employees and erased the state support system. In a normal environment this would already put employees at risk, but in a pandemic, it has been a disaster for inequality. Further, the vulnerability of low-income earners in the informal sector, especially in developing countries, has risen, compounding this global problem.

To deal with the impacts of COVID-19, many countries have had to create buffering mechanisms within the existing pension systems to alleviate the pains of its workforce. Some of these responses include allowing an early withdrawal of pension contributions, a reduction or deferral of contributions by employees and/or employees, provision of a subsidised pension, and the provision of a non-contributory pillar for unemployed.

For instance, the early full or partial withdrawal of pension contributions was initiated by Ghana for the self-employed and people who have permanently lost their jobs, and in India for those that are ill or have lost their job. Similar provisions have also been implemented in Australia, Malaysia, and Iceland.

In some countries, governments enacted policies to reduce or defer the contributions by workers to their pension account. In Thailand, social security contributions by employees – and also for employers – were reduced from five to four per cent.

In India, those earning a basic salary of 15,000 rupees (approximately $280) per month, will contribute 10 per cent, rather than 12 per cent of their monthly salary to the Employee’s Provident Fund from May until August. But those working with the central government were exempted.

In Malaysia, the mandatory monthly contribution to the Employee Provident Fund (EPF) by workers was reduced from 11 per cent to seven per cent.

Some governments have temporarily postponed or reduced pension obligations by employers in an attempt to mitigate the negative impact of COVID-19. For instance, the People’s Republic of China allowed for deferral or reduction in the employer contribution rate, depending on the location of the company within China, the size of the company, and the sector.

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Vietnam also announced the suspension of mandatory contributions by some enterprises experiencing difficulties with COVID-19, based on the degree to which they are affected.

The French government announced the deferral of social security and retirement contributions from May.

Many governments have also introduced subsidised pensions for a specific group of workers who registered under the pension scheme. In India, the central government was willing to contribute 24 per cent of the salary of employees working in firms with up to 100 workers for three months.

COVID-19 has laid bare the persistent gap in pension coverage, especially in low and middle-income countries where the working population is mainly in the informal sector. There is a clear need to create a non-contributory system in such a climate, or at least to extend its coverage to cater for those in the self-employed or informal sectors, to improve social protection and prepare workers for retirement.

The hard truth is social security pension systems are still mainly the business of government, requiring strict monitoring, regulation, and support by the state, especially in developing countries. While COVID-19 has spurred several countries to make temporary adjustments to pension schemes, in the post-COVID-19 era all governments will have to conduct a thorough review of their pension systems to fix the endemic problems that exist.

In doing so, policymakers will have to answer a number of critical questions. In addition to benefiting from public-private partnerships, the role of the state in providing pensions should be rethought. Policymakers should resist popular discomfort with increasing spending on retirement income protection, and acknowledge its many benefits for society and the economy.

While much is up in the air for pension policy, one thing is certain. In the wake of COVID-19’s economic shockwaves, the adequacy and sustainability of pension schemes must be protected and extended, and policymakers must do everything they can to make that happen.

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