Pension systems for the informal sector in Asia

Abstract

This paper looks at the experiences of various Asian countries in expanding the coverage of the pension system to informal sector workers. The paper argues that given aging and growing informality, a rapid forward-looking response from governments in the region is necessary to provide protection against the risk of poverty in old age. This risk is particularly acute in the case of informal sector workers, as is the difficulty of reaching them through traditional formal-sector pension approaches. From the analysis of various case studies the paper concludes that expanding coverage to informal sector workers through mandatory systems is unlikely to work. Alternative, voluntary arrangements are need. However, because informal sector workers tend to have lower savings capacity and high discount rates, targeted subsidies might be required to encourage enrollment. The paper discusses some of the issues related to the design of these programs - including those related to administration and the collection of contributions. In all cases, the paper emphasizes the need to resolve difficult tradeoffs between these transfers to prevent poverty during old-age and expenditures in other social programs.

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