The Role of Choice in the Transition to a Funded Pension System

Abstract

A critical question in the transition to a funded, private pension system is whether the new private element is presented as a mandate or choice to current and future workers. This report sets out the spectrum of available options and looks at policy in 13 reforming countries-Argentina, Bolivia, Chile, Colombia, El Salvador, Mexico, Peru, Uruguay, Croatia, Hungary, Kazakhstan, Poland, and the United Kingdom. It concludes that older workers are best excluded from reform because the economic benefits are small and the political resistance is likely to be large if they are included. However, a defined cut-off age is arbitrary for reasons of intergenerational equity and heterogeneity of portfolio composition and risk preferences within cohorts. A voluntary switch is preferred. The main objection is the resulting uncertainty over the numbers switching. Analysis of reforming countries shows, however, a consistent and rational pattern of switching. The paper concludes by discussing policy options for managing the switching process.

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