Middle East

The right recipe for reforming pensions

Pension reform is a thankful and necessary job. Pensions are a difficult and emotional subject that affects all citizens, and complex rules, habits and qualifications that cannot be captured by proper academic models to change the way pensions are calculated and when workers can retire. You need to negotiate a net of.
In countries with a national pension system, the main pillars are usually stipulated by law and controlled by the country. Other sources of post-retirement income come from vocational pension funds and personal investments that are market dependent but are subject to regulatory bodies such as the European Insurance and Corporate Pensions Authority.
The state does not provide all pension income, but the government has good reasons to be involved in reform efforts. After all, pension payments are more than efficient, and the insurance market’s ability to protect people in old age is limited. In addition, relying on the market to support the risks of increasing poverty for older people.
The 20th Century Social Protection Program was created with these considerations in mind. Despite the serious changes in vital and economics, they are still less important today.
Government pension pillars are usually funded on a pay-as-you-go (PAYG) basis, which relies on intergenerational contracts. The working population pays social security contributions to government pension institutions through payroll taxes. Government pension institutions pay this money more or less immediately to the retired population in the form of pensions.
Unlike private insurance programs, the PAYG system does not rely on financial reserves, but those who work pay retirees and those who are young and not yet born are the same as those who are currently working. It is based on the understanding of doing things. The state, not the market, can “guarantee” this contract by fixing future pensions in the formula, taking into account the overall flow of contributions and the rate of return corresponding to the growth rate of labor income.
Funding pension programs through private organizations may be advertised as a better option than the public PAYG system. This approach assumes that interest rates will be higher than the rate of economic growth, so pension income will be higher for the same amount of contribution. However, it has not been successful in Latin America and Eastern European countries where such drastic reforms have been introduced. In some cases, a painful policy shift was needed.
Today, mixed systems that combine both public and private options are becoming more common. But even mixed systems need reforms to ensure that pensions are sustainable and appropriate. Careful monitoring is also required to reduce or eliminate any distortion that may occur in the system. This is because rich workers benefit more than poor workers due to the implicit taxation of work done after the minimum requirements for retirement are met and the weak correlation between defined benefit contributions and pensions. Includes the possibility of getting.
The main challenge facing the PAYG system is the need to adapt to key structural vital and economic changes. As the population ages, fertility declines, and migration flows stagnant, it becomes difficult to maintain intergenerational contracts that form the basis of the PAYG system.
Over the last 25 years, European pension reform has focused on changes that raise the effective severance age, level men’s and women’s severance rules, and strengthen the correlation between individual contributions and benefits. By adopting certain defined contribution schemes, it is possible to adjust the pension to the contributions of individual workers without investing capital in the financial markets. In this type of program, the initial benefits and subsequent indexing of workers at retirement are determined by applying actuarial factors to the accumulated estimated capital, taking into account the expected life expectancy.
Good reforms cannot separate the pension system from the labor market and the economy. A dynamic and comprehensive labor market that makes it easy for workers to find a job and for employers to hire is the best prerequisite for a proper pension system. Long-term employment promotion policies such as apprenticeship and lifelong learning need to be given higher priorities and more resources.
Reforms also need to ensure that public pensions promote social solidarity and ensure that those at a disadvantage in the labor market do not suffer from severance. Solidarity can take the form of a tax-funded conceptual contribution to workers doing dangerous work, the unemployed, or workers who provide long-term care to relatives. ..
Economic growth continues to be a major variable in determining the validity and sustainability of the public PAYG system. Growth at an appropriate rate creates additional employment, reduces unemployment, encourages workforce participation and increases the likelihood of hiring citizens of active age (20-65).
But pension reform is not just a technical issue suitable for a technocratic solution. Reforms are political because they affect wealth, expectations, and life plans. They must be approved by government agencies and endorsed by the public. Without general support, there is a risk that any reform will be formally canceled or virtually avoided.
Workers must understand their pension assets in order to increase the chances of successful reforms. They need to make wise choices and be aware of investment opportunities and retirement options to avoid disappointments such as lack of pension benefits.
Workers also need to understand the basic rationale for pension reform. Governments must explain how it reduces intergenerational imbalances, strengthens the financial sustainability of pension programs, and limits distortions and privileges. Workers need some financial literacy to understand this reasoning. Unfortunately, research shows both a gap in knowledge about pensions and broader financial literacy.
Preparing for retirement is a lifelong effort, and financial education is a fundamental part of it. Governments must do more to ensure that workers have what they need to make the best decisions about severance. — Project Syndicate


* Elsa Fornero is a former Italian Minister of Labor, Social Policy and Gender Equality, an Emeritus Fellow of Collegio Carlo Alberto in Turin, and a Scientific Coordinator of the Center for Pension and Welfare Policy Research.



http://www.gulf-times.com/story/707333/The-right-recipe-for-reforming-pensions The right recipe for reforming pensions

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