Modeling the Impact of Crises on Evolution of Pension Systems

Background

Multiple research studies have examined the certain aspects of the evolution of pension systems. For instance, Orenstein (2003) treats pension reform as a political innovation and applies the diffusion of innovations theory. The study convincingly shows that international diffusion of pension systems follows the usual distribution pattern for adoption of innovations—a few countries are pioneers, followed by a steep increase in the rate of adoption, with a few laggards filling in at the end. The author examines the prospects of modern pension reforms by comparing the current spread of multi-pillar reform with the earlier diffusion of first pension system adoptions between 1889 and 1994. This approach helps to better understand the global context of pension reform, as well as the reasons and mechanisms of its spread. However, such global studies of the diffusion of pension systems and reforms are relatively few.

Lindeman et al. (2000) show how the pension systems of Eastern Europe and Central Asia responded to the new political and economic realities of the 1990s. Most of the countries in the region have replaced the state monopoly PAYG-system by a multi-pillar system that consists of a PAYG pillar and funded pillars. The authors evaluated the labor market effects and the long-term balance of pension systems and the size of the second pillar and financing the transition. However, the study only covers post-socialist countries and a short historical period.

Research in the United State (The Evolution of Public Pension Plans, 2008) found that demographic and economic pressures have led some public defined benefit (DB) plans to reexamine their plan designs, and consider blending DB and defined contribution (DC) plan features. Another research carried out by Yermo and Severinson (2010) examined the impact of the financial crisis on DB plans and proposed to develop countercyclical funding rules to enhance the sustainability and security of DB plans. However, it is important to distinguish between temporary impacts of the economic cycle on sponsor cash flows and long-term, structural changes to strengthen the plan funding status. However, the authors mainly focus only on the discussion of some regulatory initiatives that could be considered to promote procyclicality of funding rules for DB plans. It must be added that in the OECD Recommendation on Core Principles of Occupational Pension Regulation (OECD, 2009) it was noted that the “funding rules should aim to be countercyclical, providing incentives to build reserves against market downturns” (guideline 3.18).