Going Broke? Why Pension Reforms Are Needed in Emerging Economies

By Mauricio Soto

We’re all getting older, and there’s no doubt that pension reform is a hot topic in the advanced economies. But it’s also critical in emerging economies.

Our analysis here at the IMF shows that across emerging economies pension spending is projected to rise as the population ages. On average, these spending increases are not that large. But reforms are needed to increase coverage of the system without making pension systems financially unsustainable over the long term.

Rising spending

In emerging Europe, we’ve seen how pension spending has increased from 7½ to 9 percent of GDP over the past two decades. Spending also increased rapidly in other emerging economies—albeit from much lower levels—going from 2 to 3 percent of GDP over the same period. It seems the relatively low spending in emerging economies outside Europe reflects relatively low coverage (generally only those in the formal sector are eligible) and younger populations.

Populations are aging rapidly in the emerging economies. As illustrated in Chart 1, a rather grim picture is developing where we see that the ratio of elderly to working population will more than double in the next four decades. In the future, there will be many more retirees consuming what fewer workers will produce.

So taking this into account, Chart 2 shows the projected increase in pension spending over the next 20 years is about 1 percentage point of GDP. And these projections assume no expansion of coverage beyond current levels.

Several countries—Bulgaria, Chile, Estonia, Hungary, and Poland—have enacted reforms that will cut public pension spending over the next 20 years. In other countries—particularly in Asia, we see smaller projected spending increases due to lower coverage and spending. For five emerging market economies the fiscal burden will be a lot higher (more than 2 percentage points of GDP).

 Not everyone gets a pension

 In many emerging economies a large share of the elderly population is poor—in part because of inadequate pension coverage.


Percentage of the elderly who receive public pensions

Emerging Asia


Latin America


Emerging Middle East and Africa


Emerging Europe


Expanding existing pension systems to improve coverage would be costly. For example, increasing coverage from 26 to 34 percent in Asia would increase spending by 1 percentage points of GDP. Similarly, in other emerging economies outside of Europe, increasing coverage from 64 to 73 percent would increase spending by 1 percentage point of GDP.

How can pension reform help?

There is plenty countries can do to address burgeoning demographic pressures to public pension systems. The range of measures includes raising retirement ages, cutting pension benefits, and increasing revenues.

Among these options, gradually raising retirement ages has some clear advantages:

  • Promote higher employment levels and economic growth
  • Help avoid cuts in pensions, reducing the impact of reforms on elder poverty
  • May be easier for the public to understand than cutting pensions or increasing contributions.

One possible strategy would be to equalize retirement ages of men and women—in many emerging economies the statutory retirement ages of women remain lower than those of men.

For the emerging economies with low pension coverage, current systems—which are often generous but cover only a small portion of the population—should be reformed prior to expanding coverage. In addition, countries with very low coverage rates could consider “social pensions” that provide a noncontributory flat pension aimed at poverty reduction.

For countries that have substantial pension coverage, such as in Emerging Europe, continued reforms are needed to contain the growth in public pension spending. . They also need to be cautious in diverting additional contributions from public to private systems, which could make the financing of the deficit more challenging in the short run.

Many emerging economies will need to expand their pension systems to reduce poverty among the elderly. Well-designed reforms can help countries meet this objective without going broke.    

11 Responses

  1. Hi Mauricio,

    I appreciate your work on the pension reforms. Please give some examples of working pension systems. What is the ideal pension system in your view? How do you define it? What indicators will you use to confirm that it is working and is adding value for the consumers?

    So far in your articles I see only negative forecasts and no working solutions at all.


    • Mauricio Soto responds:
      Thanks very much for your comment.

      Indeed, our projections indicate that, in many countries, aging is likely to create substantial fiscal pressures in the decades to come.

      One basic objective of public pensions is to provide retirement income security within the context of a sustainable fiscal framework. Thus, crucial questions to examine systems include whether pension systems are effective at alleviating old age poverty, the extent to which the systems affect labor markets and national savings, and whether systems are affordable in the long run. Different countries approach these issues in different ways, and ultimately, the level of pension spending a country should aim for is a question of public preference.

      Of course, the need for pension reform varies greatly across countries. To address the fiscal challenge, reforms would have to curtail eligibility (e.g., by increasing the retirement age), reduce benefits, or increase revenues. Among these options, increasing retirement ages has many advantages, but this should be accompanied by measures that protect those who cannot continue to work. A recent IMF study addresses many of these issues in more detail, including country-specific recommendations (http://www.imf.org/external/pp/longres.aspx?id=4626).

  2. It is important to accept the fact that those of us who will be lucky to live into their golden years will need a lot of help in one form or another. Hence the pension debate concerns us all–even the very wealthy–as we are all interdependent. A time comes when even all the money in the world is not enough to secure one a comfortable future. By that I mean, if we have a lot of young people whose needs are not being met via enabling social and employment channels, they will rise up against the rich and rob/defraud senior citizens who have money but are at their mercy.

    So other programs should be introduced where seniors and younger people interact more often as used to be the case traditionally and their wisdom and resources the former accumulated in their active years are used for the good of all. Raising retirement ages is also a good idea since older people continue to be independent longer but may lead to resentment if there are high levels of unemployment among the younger generation and also burden government if retraining is needed in some of the jobs that the seniors are doing.

  3. Hi Mr Soto,

    I would like to bring your attention to an on-going forum discussion with regards to the definition of how the IMF recognises data presented by the Ministry of Finance, Singapore.


    I hope that a representative can shed some expertise and light on the subject matter so that as a concerned Singaporean, I can have more clarity about the manner that the our country is taking care of us when we grow old.

    Thank you for your kind attention.

  4. Any way of encouraging businesses (especially Western) in developing countries to increase pensions contributions? What are your thoughts?

  5. George, that does seem to be the issue, as pensions are cut across the board it is almost impossible for the retired to survive the onslaught of price increases. If anything, pensions should be in proportion to living costs, which at present I do not believe they are.

  6. Social security is a subject of extreme importance for every leader in these countries, but the situation is different in the poor countries. We have different worries. For instance, in my country, Burkina Faso, 57% of the population is under 20 (GeoPopulation, 2011) and the retirement age is beyond average life expectancy at birth: 57 for the first and 54 (World Bank, 2012) for the latter.

    Our realities are too diverse and the solutions of all our problems should be dissimilar.

    GeoPopulation. (2011, December 15). Population du Burkina Faso. Retrieved April 11, 2012, from http://www.geopopulation.com/20081117/demographie-burkina-faso-plus-de-14-millions-habitants-selon-le-recensement-2006/
    World Bank. (2012). Burkina Faso. Retrieved April 11, 2012, from World Bank data: http://donnees.banquemondiale.org/pays/burkina-faso

  7. Pension reform must however be seen in the context of the following problem: demographics will be the downfall of the EU economies. In 2011 alone, an unemployment rate of close to 15 percent led 150,000 of Portugal’s best citizens to leave home. Most of them flee to Brazil. Many also go to England; some go to Angola to work in the petroleum industry. Their share of the government’s debt stays behind. Their loan servicing potential, however, is acquired by their new place of residence.

    The EU and IMF assistance program runs to 78 billion euro for the 10.5 million people who live in Portugal. But the money – 8,000 euro for every man, woman, and child – does nothing to prevent the brain drain. By 2020 Portugal’s population could fall to 9 million. Under a realistic scenario, the average age of its inhabitants will rise to 47 from the current 40. That is close to the European record of 48 years, and Germany is moving in the same direction. With falling demographics already clouding the prospects for growth, what will drive an expansion in Portuguese industry by the year 2020 – innovation?

    Italy and its 61 million inhabitants, with an average age of 44 (projected to reach 47 by 2020) and – like Greece or Portugal – with just 1.4 children being born for each of its women, is groaning under the weight of its debt. Alongside it is Spain, with 47 million inhabitants and an average age that currently stands at 41 and is projected to reach 44 by 2020, with hardly any children being born.

    Nevertheless the touching melody of the Euro savior keeps insisting that only a decade is needed until “far-reaching” structural reforms will result in self-sustaining growth to pay off the debt (and, in the case of Greece and Portugal, loan assistance). How this will come about, with shrinking and aging populations whose best talents have emigrated, remains the secret of the EU inner circle.

    In Italy, the number of people aged 25 to 59, the highest performing segment of the population, will fall from 30 to 25 million people between 2010 and 2030. Although Rome posts the lowest deficit on pension liabilities in the EU, those 25 million people will later need to be covered by only 14 million people now under 24 years of age, while 21 million people already over 60 must be provided for.

    Does this sword of Damocles hang over Germany as well? Between 2010 and 2030 the economically active population (aged 25 to 59) will shrink from 40.5 to 32.5 million. To look after them there are just 18 million people under 25 coming up, while 29 million over 60 will require support to live out their old age with dignity.

    No one understands how this will work out. All we know is that for the European Stability Mechanism (ESM) to be a sustainable rescue facility, none of the major AAA-rated guarantor countries must lose their top rating, not France and less so Germany with its shrinking and aging population. If one of the guarantors falls on foreign junk paper, the whole construction will collapse. Then only the European Central Bank will be left, with its bottomless pockets, to monetize government debts.

  8. I believe the crucial point in pension system evaluation all over the world must be the plan to cover deficits (especially in the developed economies). In the midst of uncertainty, the next breaking point most probably will emerge from uncovered liabilities of governments and private sector players regarding the future pension plans of the working population.

  9. Thailand is extending the social security scheme to cover those in the informal sector. Is this a good approach? How this is going to affect its fiscal stance?

    Meanwhile, if extending the retirement age is good for the economy, how can countries convince workers that it is also good for the workers?

  10. Also the rising cost of living needs to be addressed! It is becoming not enough just to pay pensions at the lowest rate because the rising cost of everything continues and will do so, especially daily items such as utilities/food/water/fuel.

    The best way all countries can make sure they can financially take care of their retirees and disabled is to stop all these tax cuts/subsidies for the business elites. The massive revenue losses for not having a fairer tax system will cause more poverty and hardships unless nations change their attitudes and tax their wealthy elites.

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