Sweden's track record of pensions reform over the last ten years provides valuable lessons for wealthy, middle-income, and developing countries that worry about the continuing solvency of their current pensions systems, according to a new World Bank pensions report.
In reviewing the experiences of three other countries which followed the Swedish model, Italy, Latvia, and Poland, the report says that their emphasis on non-financial defined contributions (NDC) design has allowed them to organize comprehensive reforms to their pensions systems with positive results to date. An NDC system operates as individual retirement account but on a pay-as-you-go basis.
With demographic and economic pressures forcing both developing and developed countries to undertake urgent pension reform, the World Bank says an NDC approach, which still commands widespread political support in Sweden a decade after its launch, could be an important model for other countries to assess.
The report says that greater numbers of women in the global workforce, rising divorce rates, changing employment patterns in the global economy, rising budget deficits, and rising numbers of elderly are all driving the urgency for pension reform. An NDC reform helps address all these reform pressures.
Although the reform experience in Latvia, Poland, and Sweden is encouraging, we wanted to be sure that the NDC approach wasn’t just the latest fad in pensions reform, say the co-editors of the report, Robert Holzmann, director of social protection at the World Bank, and professor Edward Palmer, head of research at the Swedish social insurance agency.
Based on the evidence, NDC is a most promising new approach to pension reform at a time when virtually every country in the world is looking at the viability of their pensions systems, and wondering how to relieve their demographic and economic pressures, while avoiding creating additional burdens for future workers.