Slide 1PENSION PATTERNS & REFORM CHALLENGES IN SUB-SAHARAN AFRICAPensions Core CourseMark DorfmanThe World BankApril 2, 2013
Slide 2April 2, 2013Organization1. Design summary2. Challenges3. Policy options4. Design reform principles5. A process for evaluation
Slide 3April 2, 2013…design matrixLabel &Desc.Mand.Cont.SchemesforPrivateSectorOcc.SchemesPublicSectorOccupationalPension SchemesNon-contrib-utoryPensionsCountries0/3a/3b None Yes Prominent sourceof old age incomeprotection (cov. +benefit level)CoveragenearuniversalSouth Africa, Botswana, Namibia, Lesotho, Namibia,Swaziland0/1/3a/3b - Yes, w/modesttarget RRYes Modest coveragean benefits forselect workersStrongand nearuniversalSeychelles, Mauritius, Cape Verde3a/3b - CS +limited occNone Yes Limited and weaklyregulatedNone Ethiopia (until 2011), Malawi (until 2011), and Liberia.1/3a/3b -Modest DBscheme, + CSschemeYes -partiallyfundedDBYes Yes but heter-ogeniousprevalence.None on anationalbasis.Benin, Burkina Faso, Burundi, Cameroon, CAR, Chad, CongoRepublic, Cote d’Ivoire, DRC, Ethiopia (2012+), Equatorial Guinea,Gabon, Ghana, Guinea, Guinea-Bissau, Madagascar, Mali,Mauritania, Mozambique, Niger, Rwanda, San Tome & Principe,Senegal, Sierra Leone, Sudan, Togo, Zambia, and Zimbabwe2/3a/3b -ProvidentFunds,CS +limited 3rdYes –providentfundsYes Modest coveragean benefits forselect workersNational(Swaz.)pilots(Kenya)Uganda, Swaziland, Kenya, The Gambia2/3b 2ndPillars orHybridsYes –mand. DCschemesYes –integ.w/priv.Yes but at varyinglevelsNonationalschemesNigeria, Ghana (after 2010), Malawi (2011), andTanzania (under consideration)I. Stylistic Design Typology
Slide 4April 2, 2013II. Challenges - Earnings-related schemes have largely failed1.Small fraction of covered workers & elderly2.Aging & civil servant scheme maturation =>increasing fiscal pressure3.Reserve management yielded poor returns &incentives (augmented by administrative costs)4.Question of whether existing designs need to bereconsidered
Slide 5April 2, 20131. Poor coverage0102030405060708090100%ofcoveredpopulationShare of population above legal retirement age in receipt of a pension (%)Active contributors to a pension scheme in the working-age population (%)Tiny % of workers covered in 50 years (median 5.1% of working age pop):• Earnings-based design ill-suited to rural/informal populations• High target replacement rates & cont. rates Sign. elderly coverage only in 8 countries w/non-contributory schemes.
Slide 6April 2, 2013…in large part because of low incomesy = -1E-09x2 + 2E-05x + 0.0212R² = 0.26250.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%20.0%0 1000 2000 3000 4000 5000 6000 7000CoverageofWorkingAgePopulation(%)GDP per Capita (late 2000s, US$)Cape VerdeCameroonUgandaGuineaSwazilandDRCMauritaniaNigeriaGhanaRep of CongoSudanBurundiChadTogoMozambiqueBeninZambiaSource: World Bank database.Note: Data points are from late 2000s.Correlation between Working Age Coverage & Per Capita Income in Sub-Saharan Africa
Slide 7April 2, 2013…with populations largely rural and informal Rural pop. prominent but declining. Earnings-related schemes left out rural and informal sector populations.
Slide 8April 2, 2013…and contribution rates relatively high for low income workersA0.05.010.015.020.025.030.035.0SouthAfricaMauritaniaZimbabweLiberiaRwandaCongo,Dem.Rep.CameroonCentralAfricanRepublicGabonCotedIvoireChadMauritiusMaliKenyaSaoTomeandPrincipeSwazilandZambiaBurundiBeninCapeVerdeMadagascarNigerBurkinaFasoEritreaTogoCongo,Rep.GuineaSenegalNigeriaSierraLeoneUgandaGambia,TheEthiopiaGhanaTanzaniaSeychellesSudanEquatorialGuineaContributionRate(%ofCoveredWage)Additional Contribution Rate for Non-Old Age Social Security Employer Old Age/Disability/SurvivorshipEmployee Old Age/Disability/SurvivorshipContribution Rates
Slide 9April 2, 20132. Aging in national & civil servant schemematuration drive increases in fiscal pressure• Fiscal costs of many formal sector schemes (esp. for civil servants)consume increasing portions of government budgets.• Contribution rates & benefit formulas not consistent with long-run balance• Early stage in demographic transition, but covered workforce (esp. in civilservant schemes) older and aging more rapidly.Old-age dependency ratios
Slide 10April 2, 2013… and old-age dependency rates likely higher for covered populationsSenegal: Projected National and Civil Service Population Age DistributionsSenegal: Projected Dependency Ratios
Slide 11April 2, 2013…with target replacement rates too high to be sustained oraffordable0%10%20%30%40%50%60%70%80%90%GhanaTogoZimbabweCentralAfricanRepublicCameroonLiberiaGabonMauritaniaCongo,Rep.CotedIvoireChadSaoTomeandPrincipeEthiopiaNigerBeninBurkinaFasoBurundiCapeVerdeCongo,Dem.Rep.GuineaMadagascarRwandaSierraLeoneTanzaniaMaliEquatorialGuineaSimulatedReplacementRateSimulated Replacement Rates
Slide 12April 2, 2013…and unsustainable fiscal burdens over the medium-termTanzania: Pension Financing GapsProjected Cash-Balance in theMandatory NationalSocial SecurityScheme in Niger-0.35%-0.30%-0.25%-0.20%-0.15%-0.10%-0.05%0.00%Netpensionexpendituresas%ofGDPScenario 1 (pensions indexed toinflation)Scenario 2 (pensions are NotIndexed )
Slide 13April 2, 2013…as well as growing costs of civil service schemes as coveredpopulations age0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%20062011201620212026203120362041204620512056206120662071price indexation no indexationThe Gambia: Projected Expenditures forthe Public Service Pension FundUganda: Public Service Pension Fund Projected BaselinePension ExpenditureFigure 26: Uganda: Public Service Pension Fund Projected Baseline Pension Expenditure(% of GDP)-1.2%-1.0%-0.8%-0.6%-0.4%-0.2%0.0%Source: World Bank, Options for the Reform of the Public Service Pension Fund inUganda, December 2010.
Slide 14April 2, 2013…expenditures on national and civil service schemes aremodest though increasingPension Spending and Civil Service Pension Spending(% of GDP – late 2000s)0.000.501.001.502.002.503.003.50EritreaEthiopiaCameroonCongo,Dem.Rep.Gambia,TheUgandaSierraLeoneMauritaniaBurundiBurkinaFasoCotedIvoireNigerRwandaCentralAfricanRepublicTogoTanzaniaNigeriaCapeVerdeGhanaNamibiaBotswanaKenyaZambiaBeninMaliSenegalMozambiqueGuinea-BissauSouthAfricaZimbabweMauritiusSeychellesExpenditureasa%ofGDPTotal Spending Civil Service ExpendituresSource: World Bank database.
Slide 15April 2, 20133. Reserve management yielded poor returns & incentives1.Reserve management has yielded returns < per capitaincome or wage growth due to multiple factors incl.limited investment options2.Public pension funds often heavily impact pricedetermination in important market segments (treasurybonds, real estate, listed equities) + impact fiscalspending incentives3.Should public pension funds actively invest in small andoften weak financial markets?
Slide 16April 2, 2013…and administrative costs further aggravating the fiscal threatAdministrative Expense Indicators(US$ or % of Benefits/Expenditures)0.0%20.0%40.0%60.0%80.0%100.0%120.0%140.0%160.0%180.0%200.0%$0.0$50.0$100.0$150.0$200.0$250.0$300.0$350.0$400.0x x x x x x xBotswana-POPENamibia-GIPFSwaziland-PSPFSouthAfrica-GEPFUganda-NSSFTanzania-PPFBurkinaFaso-CNSSGhana-SSNITKenya-NSSFTanzania-GEPFSierraLeone-NASSITRwanda-RSSBKenya-CSPSMauritius-MNPSpercentUS$Administrative Expense per Insurance Benefit- US$ - left axisAdministrative Expense as % of Benefits percent right axisAdministrative Expense as % of Revenues percent right axisSource: Oleksiy Sluchynsky, Defining, Measuring and Benchmarking Administrative Expenditures of Public Pension Programs. Draft,mimeo, 2012. Note: An “x” above the scheme indicates that the actual costs of operation are more than 5 times the predicted levelsbased on the averages observed for 100 pension and social security programs throughout the world.
Slide 17April 2, 20134. Question of whether existing designs need to be reconsidered1.Do mandatory wage-based schemes make sense forpopulations with much of the population withoutpredictable wage incomes?2.How does contributing for old-age fit with other SPpriorities (eg. loss of income, health or other shocks)?3.What are sensible principles for social assistance &social insurance design appropriate to needs,objectives & conditions in SSA?
Slide 19April 2, 2013III. Policy Options: Social Pensions0.000***0.050***0.100***0.150***0.200***0.250***Ghana Malawi Nigeria RwandaInd OverallInd ElderlyInd Working AgeInd Youth0.000***0.050***0.100***0.150***0.200***0.250***Ghana Malawi Nigeria RwandaHouseholdsOverallElderly OnlyHouseholdsSome ElderlyPoverty PrevalenceSource: Bank estimates, 2013.
Slide 20April 2, 2013III. Social Pensions: Old & New0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%2.00%0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%Botswana Swaziland Mauritius Namibia Seychelles Cape Verde South Africa LesothoShare 60+Benefit % of GDP per capitaTotal Cost (% of GDP) - (RIGHT AXIS)8 countries with national schemes, 4 pilot programs.7 universal, 3 pensions tested & 3 means-testedBenefit levels between 10% and 35% of per capita GDP, (Botswana lower).Annual costs for mature schemes 0.3% - 1.8% of GDP
Slide 21April 2, 2013… closing the elderly poverty gap is costly for many countries-0.20.40.60.81.01.21.41.6Cost(%ofGDP)Women MenBudget as a % of GDP to Eliminate Poverty Gap for the ElderlySource: Kakwani and Subbarao, Aging and Poverty in Africa and the Role of Social Pensions. 2005.
Slide 23April 2, 2013IV. Design Reform Principles (2)Social pensions Link benefits & targeting to old-age income protection Link benefits to social assistance objectives &instruments Weigh elderly assistance against other developmentpriorities Utilize unified infrastructure for safety nets -identification, targeting, record-keeping, disbursement.
Slide 24April 2, 2013V. A Process to Consider Reform• Project baselines of existing schemes & parametricreforms with Actuarial Modeling (PROST)• Evaluate full scope & sequencing of social protectionmeasures for coverage expansion (health insurance,old-age, survivorship, CCTs)• Map programs to satisfy institutional requirements &enabling conditions