The Future of Saving: The Role of Pension System Design in an Aging World an International Monetary Fund report published in 2019 has some interesting views and is worth a read by those who are interested in how we as global citizens are dealing with an ageing population. The purpose of the reports is to showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. So here are some of the conclusions reached about improving pensions, increasing private savings, and keeping the labour force high.
Improving the pension system adequacy to reduce precautionary saving.
In China, for instance, the transition to a market-based economy that began in the 1980s resulted in a weakening of the social safety net, reducing pension spending and social transfers to very low levels. Lower-income households now have a saving rate of 20–30 percent, compared with minus 20 percent in many peer countries (IMF 2017).
Similarly, in Korea, the public pension system covers only about a third of the elderly, and replacement rates are low by international comparison, resulting in a saving rate of nearly 30 percent. These countries have room for fiscal maneuver; they could redirect resources to reduce old-age poverty by expanding coverage of the social security systems, raising social pensions, and enhancing targeted social transfers. These actions would reduce households’ need for precautionary saving while ameliorating inequality and old-age poverty.
Boosting private saving by improving pension system architecture.
The presence of a Defined Contribution scheme can support higher private saving rates, attenuating the negative effect of ageing on national saving. Countries with an enabling environment might consider complementing the public pension scheme with a funded Defined Contribution scheme.
However, such reforms are not a panacea to deal with the ageing challenge; for example, too few people may be covered or contribute to the system, or contributions over the working life of an individual may fall short of providing adequate pension benefits at retirement—many private pension funds are underfunded. In addition, future returns on savings (interest and investment rates) in an ageing world could be lower, leading to lower-than-expected returns on the accumulated assets in such systems. In this case, governments might still have to make up for at least part of the gap.
Development of financial sector instruments to encourage voluntary saving.
The ability of households to diversify retirement-related risks will depend on the availability of age-specific financial products (for example, annuities and long-term care insurance). Countries with underdeveloped financial sectors would benefit from boosting financial inclusion (for example, efforts to reduce the costs of bank account for individuals) and creating sound and resilient banking sectors that offer the right mix of long-term saving instruments.
Financial literacy could foster a culture of saving and help people better plan for retirement. And government policies could focus on increasing voluntary private saving; for example, by providing tax-preferred saving vehicles related to pensions, such as the 401(K) plans in the United States. Tax-preferred general or education saving accounts could also be considered, but the participation of middle-income households would be essential for these schemes to generate additional saving rather than displacing existing saving elsewhere (OECD 2007). Nudges to encouraging workers to save can also help; for example, by automatically enrolling them in pension schemes, as in the United Kingdom.
Counteracting the effect of ageing on labour supply.
On current demographic trends, many countries will face a declining labour force, which will drive down saving. Policies should focus on reforms that close gender gaps in labour force participation (as was done in Italy and Spain) and encourage people to lengthen their productive work lives, given their increased longevity.
Policy actions could include ensuring equal remuneration for equal work and providing childcare services. Governments can make it easier for older people to remain in the workforce by reconsidering taxes and benefits that favour early retirement.
Migration could also play a role in boosting the labour force in many advanced economies, but this is a politically contentious issue. In many emerging market economies, it is important to decrease the large share of young people who are neither participating in the labour market nor studying. Furthermore, reducing the large share of the labour force that does not work in the formal sector—and thus does not pay taxes or contribute to social security—could boost saving.
Education and training policies could use some modifications to better align skills with rapid technological change, which will replace labour in some sectors but maybe labour-augmenting in others. Private (and to some extent public) saving will play a key role in helping individuals cope with these trends and changes.
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