Designing Pension Systems for Developing Countries

Olivia S. Mitchell and Gary S. Fields

Abstract — Retirement system redesign is underway in many developing nations. Because these reforms are often responses to system near-insolvency, pension reforms are often targeted at solving short-term problems rather than at long term objectives. This paper examines what pension systems can and cannot hope to accomplish in the developing economy context in the longer run. The discussion is aimed at budget experts restructuring fiscal policy, experts concerned about poverty, and growth specialists seeking new sources of funds for capital market development. We begin by identifying the key objectives of a well-functioning retirement income system, and evaluate labor market and other risks that must be taken into account in designing a viable and sustainable pension system. Recommendations that apply to virtually any institutional conditions are followed by suggestions regarding aspects of pension systems that must be designed in light of the economic and institutional circumstances prevailing in a particular country. Three prototypic pension systems are assessed with regard to their appropriateness for developing countries with diverse background conditions. We conclude that by taking due account of labor market and other risks, policymakers can design public and private pension systems in ways that will help provide greater economic security for retirees, while at the same time being efficient and equitable institutions.