Many developing countries are on track for the kind of economic growth that will help more of their citizens to live longer and leave the workforce at some point. At the same time, this economic growth is contributing to changed patterns in society, such as urbanization and smaller families, which undermine the traditional care of the elderly by the family.
Pensions are scarce in developing countries
While pensions are scarcely unknown in developing countries, many of these countries have a large cross-section of their workers, often two-thirds or more, in the informal sector. Even those who are in the formal sector have seen declining pension coverage in many countries.
Listed infrastructure bonds
Covering all workers is the first challenge many developing countries are facing. Another is the question of where to invest pension savings. One solution, embraced by South Africa, is listed infrastructure bonds: these bonds are allowing pension funds to finance the country’s renewable energy program.
South Africa policymakers got the idea from Latin American, where pension funds have a long history of financing toll roads and other infrastructure projects.
Covering workers in the developing world
Where workers in the developing world have been covered by pensions, particularly in the public sector, many of those pensions have traditionally been defined benefit plans. These plans have the employer guarantee employees a specific benefit amount upon retirement.
However, in keeping with the same general trends observable in the developing world, many developing countries have been shifting away from defined benefit plans and toward defined contribution plans, wherein employees make a specified contribution and employers then contribute matching funds.
Saving for retirement in poor countries
Overall, the situation in many poor countries is very challenging with regard to saving for retirement. While family support is still an option for many people in the developing world, in many of these countries the majority of workers have no hope of a pension.
South Africa, Mauritius, and Botswana are the ones with substantial pension coverage
About one-third of the labor force are covered by public pension systems in the region of the Middle East and North Africa, but only about 5-10% of the elderly are able to draw a pension. In sub-Saharan Africa, the countries of South Africa, Mauritius, and Botswana are the ones with substantial pension coverage.
Saving for retirement
Saving for retirement is difficult enough in the First World, even with pension programs. In much of the developing world, however, it is for all intents and purposes prohibitive. Only time will tell whether many of these countries will be able to develop effective pension systems that will facilitate comfortable retirement for more than a minority of their populations.