THE FUTURE OF SAVING: THE ROLE OF PENSION SYSTEM DESIGN IN AN AGING WORLD
INTERNATIONAL MONETARY FUND 29
income households now have a saving rate of 20–30 percent, compared with minus 20 percent in
many peer countries (IMF 2017). Similarly, in Korea, the public pension system covers only about a
third of the elderly, and replacement rates are low by international comparison, resulting in a saving
rate of nearly 30 percent. These countries have room for fiscal maneuver; they could redirect
resources to reduce old-age poverty by expanding coverage of the social security systems, raising
social pensions, and enhancing targeted social transfers. These actions would reduce households’
need for precautionary saving while ameliorating inequality and old-age poverty.
34. Boosting private saving by improving pension system architecture. The presence of a
DC scheme can support higher private saving rates, attenuating the negative effect of aging on
national saving. Countries with an enabling environment might consider complementing the public
pension scheme with a funded DC scheme.
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However, such reforms are not a panacea to deal with
the aging challenge; for example, too few people may be covered or contribute to the system, or
contributions over the working life of an individual may fall short of providing adequate pension
benefits at retirement—many private pension funds are underfunded.
33
In addition, future returns
on savings (interest and investment rates) in an aging world could be lower, leading to lower-than-
expected returns on the accumulated assets in such systems. In this case, governments might still
have to make up for at least part of the gap. Country experiences also suggest that pension system
transitions from PAYG to funded schemes can generate large and persistent fiscal costs (to fulfill the
promises made to people who had contributed to the old systems) that reduce national saving.
35. Development of financial sector instruments to encourage voluntary saving. The ability
of households to diversify retirement-related risks will depend on the availability of age-specific
financial products (for example, annuities and long-term care insurance). Countries with
underdeveloped financial sectors would benefit from boosting financial inclusion (for example,
efforts to reduce the costs of bank account for individuals) and creating sound and resilient banking
sectors that offer the right mix of long-term saving instruments. Financial literacy could foster a
culture of saving and help people better plan for retirement. And government policies could focus
on increasing voluntary private saving; for example, by providing tax-preferred saving vehicles
related to pensions, such as the 401(K) plans in the United States. Tax-preferred general or
education saving accounts could also be considered, but participation of middle-income households
would be essential for these schemes to generate additional saving rather than displacing existing
saving elsewhere (OECD 2007). Nudges to encouraging workers to save can also help; for example,
by automatically enrolling them in pension schemes, as in the United Kingdom.
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The enabling environment requires the existence of some important preconditions. First, macroeconomic stability
needs to be secured to enable the development of long-term capital market instruments. Second, a sound financial
sector and infrastructure, including legal and regulatory infrastructure and adequate supervisory capacity, needs to
be in place to allow for the proper management of pension savings. Third, proper collateralization and bankruptcy
procedures, creditor and property rights, accounting regulations, and adequate payment system are all necessary to
ensure the credibility in the funded scheme.
33
The average ratio of underfunded pension liabilities to annual revenues remained at about 6 percent from 2011
through 2016 (Grunfeld 2017, using 5,100 global public companies). Moreover, there are concerns that the extent of
underfunding might be understated because of the use of accounting rules that help reduce the size of estimated
liabilities (for example, Kisser, Kiff, and Soto 2017).