February 15-18, 2005 Pension Reform Technical Assistance U. S. Agency for International Development (USAID)

USAID History and Background Created in 1961, by President John F. Kennedy to provide long-range economic and social development assistance Key areas of support:  Economic growth, agriculture and trade;  Global health; and  Democracy, conflict prevention and humanitarian assistance

USAID ’ s Financial Sector Strategy Importance of Financial Sector Development Can fuel economic growth Help alleviate poverty through access to savings and capital Help reduce economic instability, which disproportionately hurts the poor and vulnerable

Financial Sector Products and Services SME and Microfinance Pensions Banking Housing Finance Property Registration Insurance Credit Rating Agencies Credit Unions

Why Pension Reform? A - Alleviate Poverty for the Elderly Social Protection Issue B - Budget Impact Fiscal Stability Issue C – Capacity to Ensure Accuracy, Reliability, and Protect Participants’ Rights Institutional Capacity Building Issue

Common Problems  Low Pension Benefits  Poor Administration  Financially Strained Systems  No Private Pension Industry  In-kind Contributions and Benefits

…… Problems and Constraints  Benefit Arrears  Shadow Economy  Poor Compliance  Low Retirement Age  Declining Birth Rates  Benefits Not Tied to Contributions

Common Policy Considerations  A ge (RA)  B enefit (RR)  C ontribution (CR)  Demographics (DR)

Common Pension Reform Expectations  Increased Savings  Increased Pension Benefits  Reduction of the Shadow Economy  Steady Cash Flow for the Capital Market

…….. Expectations  Reduction in Payroll Tax Rates  Timely and Reliable Reports  Reasonable Rules and Uniform Enforcement  Safety and Security of Privately Managed Accounts  Technological Advancements

Solutions Reform the 1st Pillar for Sustainability Private Pension Funds – Mandatory or Voluntary Individual Accounts for all Pillars

The 3 (4?) Pillars 1st pillar PAYG Government Managed Defined Benefit 2nd pillar Mandatory Defined Contribution Privately Managed 3rd pillar Voluntary Employer-Sponsored and Individual Plans

Structural Pension Reform Issues  Defined Benefit vs. Defined Contribution  Earnings-related vs. flat-rate benefits  Funded vs. Unfunded  Compulsory vs. Voluntary  Government Managed vs. Privately Managed  Guarantees vs. No Guarantees

The Cost?????  The Transition Costs  Investment in Human Capital Before and After the Reform  Technology Upgrades  Working with International Donors

How Has USAID Helped?  Legal and Regulatory Framework  Actuarial Analysis and Training  Public Education  Information Systems  Compliance and Enforcement  Education, Education, Education  Internships

USAID’s Approach to Pension Reform TA Grant assistance, no loans Activities are in response to a country’s request for technical assistance (DEMAND DRIVEN) Utilize a wide range of experts from around the globe Daily, long-term contact with the counterparts

What Have We Learned?  Pension reform tends to follow other basic reforms such as banking and capital markets  Highly political and emotionally charged  It cannot be successful without broad citizen participation – weigh-in and buy-in  Each reform is similar but very different

Key Ingredients Pension reform is not a leading edge reform. Pension reform builds on other financial and economic development initiatives, providing long- term capital for sustainable grown. Appropriate legal structure Effective financial sector regulation and supervision Economic stability Empowering Citizens to Avoid Old-Age Poverty

Thank you Denise Lamaute