The Inverting Pyramid: Pension Systems Facing Demographic Challenges in Europe and Central Asia

Abstract

Pension systems in Europe and Central Asia are facing unprecedented demographic change. While many of the countries in the region have undertaken reforms when the economy faces difficult times, these reforms are frequently reversed when the economy improves. The demographic challenges that the region faces require a sustained effort toward changing the pension system toward something which provides adequate and sustainable benefits. The book documents the increased generosity of pension systems in Europe from their initial inception, noting that the current expectations of the public are based on the most recent round of generosity. The book seeks to show a nontechnical audience that such generosity is neither based on customary practice nor affordable in the future. The increased generosity in the past was only possible because the demographic pyramid was expanding, but as it inverts with fewer young people and more elderly, that generosity will no longer be affordable. Returning to the pension system of the 1970’s will go a long way toward providing adequate and sustainable benefits in the future. Moving to a more sustainable system will require reforms to labor markets, improvements in savings mechanisms, and may require additional public resources. The extent to which a country can undertake reforms in labor markets, savings, and public finances can influence the extent to which its pension system will have to change, with different solutions possible for different countries. But in all cases, the changes that need to be made have to be widely discussed and publicly accepted to prevent reversals. The book hopes to stimulate widespread public discussion of the issue to help countries make sustainable choices with gradual implementation, before they face such daunting challenges that they have to undertake sudden, harsh measures.

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