The rise and fall of the World Bank’s global pension model

Martin Heneghan  - Doctoral Researcher, Department of Sociological Studies, University of Sheffield

However, after 2004 there was a lull in countries privatising their pension systems. President George W. Bush failed to get a multi-pillar pension reform through the US Congress and the World Bank itself began to take a more critical approach to the question of pension reforms.  In an evaluation of the project in Latin America, it was concluded that all the promises of the reforms had not been met.  The coverage of the pension system was disappointing in most of the region, whilst the high administrative costs of managing individual pension funds (in comparison to public systems) had reduced the generosity of the returns.  This dovetailed with criticism from within and outside of the World Bank on the perceived benefits of privatisation from eminent economists like Joseph Stiglitz and Nicholas Barr.

In 2008, at the onset of the global economic crisis, Argentina completely renationalised its private pension pillar, bringing the private resources into the state coffers.  The same move was later made by Hungary in 2010.  On the surface, this appeared to be the isolated actions of two populist governments keen to court favour with their electorates by displaying their radical credentials.  However, the trend began to spread.  In Latin America, Chile scaled back its private pension pillar, whilst Ecuador renationalised its system.  Meanwhile, in Central and Eastern Europe, Latvia, Estonia, Russia and Lithuania suspended contributions to the private pillar and Slovakia, Kazakhstan and Poland renationalised all or part of their private pension pillars. The planned privatisation of the Ukrainian pension system was similarly suspended and the more recent privatisation of the Czech Republic’s pension system has also been reversed.   All these developments raise substantial questions about the desirability and sustainability of a mandatory private pension system going forward.

The flaws in the model are two-fold: first, there is the market failure of a mandatory private system.  Managing private accounts requires sufficient resources.  An individual fund manager must allocate investments for each individual pension pot. This contrasts greatly with the administrative efficiency of a public pension system calculated from a basic formula.  During an economic downturn, pension fund holders inevitably experience market volatility, which can significantly reduce the value of a pension.

Second, there is the issue of the ‘double payment problem’.  Since those already retired, or close to it, cannot set aside resources for retirement, their pensions must be funded by the current workforce.  However, following a privatisation, the current workforce must also save for its own retirement.  This effectively doubles the cost of pension provision during the transition from a public to private system.  The World Bank recommended that public sector borrowing should fund the transition.  But this was particularly problematic in Central and Eastern Europe.  The universal nature of the communist welfare system meant that the transition costs were relatively higher than in other regions.  Furthermore, accession to the European Union stipulated that countries could not run a budget deficit greater than 3% of GDP.  Given that transition costs were as high as 1.8% of GDP in Poland, renationalising the private system and instantly reducing the deficit proved to be too tempting for governments to resist.  In addition, the significant migration of parts of the working-age population from the East to the West of Europe increased the dependency ratio of the pension system, making the problem more acute.

In sum, whilst the spread of pension privatisation was quick, its reversal has been even more rapid and dramatic.  Within just a few years of the onset of the global economic crisis, most countries have either completely reversed their reforms or reduced the importance of private provision in the mix of pension pillars.  This suggests that, in respect of providing income in retirement, the state still has a major role to play in the future.   The whole experience represents the rapid demise of a treasured neoliberal pet project.