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the working generation to abrogate. This may be the greatest social cost of the central planning pension legacy.


Almost without exception, the debate about pension reform in the post-communist states is about what kind of system should be put in place for the pensioners of the twenty-first century—today's workers. Most countries envision leaving the pensions already granted to current pensioners as is (with some form of purchasing power guarantee, either partial or full), as the politics of taking away a benefit already granted are almost insurmountable.

In demographically mature countries, old-age security systems should achieve the following goals:

  • Prevent poverty in old age.

  • Assist with income smoothing by supporting savings and insuring against the risk of long life.

  • Equitably support economic growth and development.

While the systems of the post-communist states have been effective in preventing old-age poverty during the transition, they have done so at a cost, as discussed above, and thus have not contributed to the third goal above. The high and growing number of the aging relative to workers means that this cost will only continue to rise. By relying on pay-as-you-go funding, these systems have also not encouraged savings.

Based on an analysis of pension systems around the world, the World Bank (1994) recommends a combination of pay-as-you-go and funded pension systems.3 Achieving such an arrangement involves setting up a multipillar system that includes the following elements:

  • Pillar 1—a mandatory pay-as-you-go public pension system designed to provide an income floor for all elderly persons

  • Pillar 2—a mandatory funded and privately managed pension system—one whose current reserves are equal to or greater than the present value of all future pension payment liabilities, based on personal accounts (the Latin American approach) or occupational plans (the OECD approach)

  • Pillar 3—a voluntary system (also funded and privately managed), with strong government regulation, to provide for additional savings and insurance.

Reform of pension systems to bring them closer to the World Bank's recommendations implies (1) longer working lives and (2) less income re


Similar recommendations are offered in Disney (1996). For a critique of these recommendations, see Beattie and McGillivray (1995). James (1996) offers a response.

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