FINANCIAL CRISIS HITS PENSION SYSTEMS IN EUROPE AND CENTRAL ASIA

World Bank cautions countries against addressing short-run fiscal constraints with long-term policy changes.

The financial crisis has significantly impacted pension systems in the countries of Europe and Central Asia (ECA)* and many of the governments have been tempted to make policy changes in response to the increased pension deficits, says 'Pensions in Crisis,' a World Bank Regional report released today. But despite the severity of the crisis, it pales in comparison to the demographic crisis which the region will face, and World Bank experts urge countries in the region not to make any policy changes focused on addressing short-term fiscal concerns that make the long-term even worse.

The new report analyzes the impact of the financial crisis on pension systems of ECA countries, reviews the initial policy responses by individual governments, and provides recommendations on how to strengthen pension systems in the region both in the short- and long-term.  World Bank experts concluded that though pension systems in ECA come in all shapes and sizes, no pension system, however well structured, proved immune to the crisis.

"The financial crisis affects each component of a pension system differently, and while magnitude and timing may be different, each component is adversely affected," said Anita Schwarz, main author of the Report and the World Bank Lead Economist in the Europe and Central Asia Region. "Sharp falls in output and reduction of the overall tax base reduced public funds available for pension systems, while at the same time growing unemployment, drops in wages, and depreciation of financial assets negatively affected systems financed by worker and employer contributions."

The new study finds that ECA countries, once hit with a sudden shock to the fiscal balances of their pension systems, started considering and implementing policy changes that both increase resources and cut expenditures. The report warns policymakers that actions which generate short-term benefits may involve additional costs in the future. According to one simulation, even the most severe scenario of the financial crisis pales in comparison with the effects of the demographic crisis that is looming in the region.

"It is alarming to look at what the Europe and Central Asian countries are soon to face as the region continues to age," said Schwarz. "Future pension system deficits can be threefold than what is currently expected, and are expected to remain at that level for more than 20 years before slightly improving. Policymakers need to use the opportunity of the current crisis to address long-term issues, which could bankrupt pension systems precisely when the numbers of people who need them are growing."

Given the diversity of ECA countries, there is no one blueprint for reforms.  Broadly, the report recommends - depending on the country - a combination of measures, including moving to inflation indexation of pensions after retirement, increasing the retirement age and equalizing the retirement age of men and women, and reducing early retirement.  In addition, it suggests provision of better insurance against the volatility of financial markets, and calls for the acceleration of regulatory and supervisory reforms that will allow pension funds to earn better rates of return along with further development of capital markets. Finally, it urges governments to promote awareness among their citizens that public pensions will need to be less generous than in the past if they are to be sustainable.