- Only a minority of older men and women enjoy income security in old age; in large parts of the world, old age still constitutes a major poverty risk.

- Similarly, limited earnings capacity as a result of severe disability constitutes a major poverty risk for men and women with disabilities and their families. Invalidity pensions provide income protection for insured persons who are no longer able to engage in any employment, or who have reduced earnings capacities as a result of disability. Such contributory pensions are complemented by non-contributory disability benefits, whose scope of coverage is wider than the insured population.

- Income security for survivors is provided through survivors’ pensions.

- When countries in which social security is fairly developed have a pension system in place, they typically consists of several pension schemes that either cover certain groups of the population or have different specific objectives. Many, but not all, of those pension schemes cover the risks of old age, disability and survivorship.

- In most middle- and low-income countries, pension schemes are concentrated on formal sector employees, mainly in the civil service and large enterprises. Those not covered by formal pension schemes have to rely on the support of their families and communities...

As a result, the numbers of the older poor are increasing, and they are over-represented among the chronically poor. A majority of the world’s older people receive no regular income, and many live on less than US$1 a day.

Coverage by contributory and non-contributory pensions

- Worldwide, nearly 40 per cent of the population of working age enjoys statutory coverage by contributory old-age pension schemes. In all regions, the proportion of voluntary contributory programmes hardly reaches 4 per cent of the working-age population.

- Effective coverage is, however, significantly lower than statutory coverage, and with the exception of North America and Western Europe, effective coverage is quite low in all regions, although it is still around 50 per cent in Central and Eastern Europe. But in sub-Saharan Africa, only 5 per cent of the working-age population is effectively covered by contributory programmes; this share is about 20 per cent in Asia and the Middle East, and 10 per cent in North Africa.

- While the above considerations refer to active contributors as a proportion of the working-age population, it is also important to consider the current generation of pensioners, and to include the effects of non-contributory benefits. Coverage ratios of more than 90 per cent are reached by some countries in Europe, as well as Canada; most other industrialized countries have coverage ratios of between 50 and 90 per cent of the population above retirement age, as do a number of middle-income countries with non-contributory social pension schemes in Africa and Latin America. In large parts of Africa, Asia and Latin America, coverage rates are significantly lower, often less than 20 per cent of the elderly population.

- Efforts to expand coverage gradually through contributory schemes must be coupled with the introduction of non-contributory pensions, which can immediately provide income support to those already in the old-age brackets.

- Pensions not only provide benefits for older people and those with disabilities but also use this disadvantaged group as effective agents of social transfers for whole families.

- Pension recipients redistribute cash income in the household, finance school fees and medication, etc. Pension income often finances investment in assets and small business, which in turn provides financial resources for the care of very vulnerable children and orphans.

- The need to extend coverage is most urgent in middle- and low-income countries where coverage rates are low. To begin with, pension schemes in these countries tend to cover a restricted proportion of the workforce, mainly those in formal wage employment.

- For most of the OECD countries, the proportion of pension beneficiaries to the population over retirement age is close or equal to 100 per cent of the elderly population.

This tends to increase pressure to reform pension systems and to reduce the level of provision for future generations of retirees.

- At the same time, the majority of older people in the world – particularly in low-income countries – are obliged to continue working, mainly in the informal economy, because they are not entitled to pensions, or if these exist they are too low.

Pension coverage has a strong gender dimension

In most countries women are less represented in the formal economy, and are therefore less likely to be covered by social insurance pensions as compared to men. When women do receive social security pensions in their own right, they usually receive them under similar conditions to men, according to their earnings and years of service. While differences in legal provisions for men and women (e.g. prescribing different minimum pensionable ages) may lead to small gender differences in terms of benefit levels and coverage, gender-specific employment patterns are reflected in social security entitlements and account for considerable differences in social security coverage. In Argentina and Jordan, around 65 per cent of all men above the age of 60 receive a pension, but only 33 per cent of women in Argentina and 10 per cent of women in Jordan receive pension benefits.

Another pattern is that the husband contributes to a social security pension scheme, while his wife is dependent on his pension. This is the classic model of the male breadwinner. In this situation women are entitled to derived pension rights, which are typically lower than pensions in their own right. In addition, these entitlements are often conditional on the continuation of the marriage, which leaves women in a potentially vulnerable position. How a woman benefits during retirement depends on the intra-household decision-making process. In the event of her husband’s death, a woman normally receives less of his previous pensions. If a marriage breaks down, there is usually no splitting of pension claims between husband and wife. At best, wives will then be eligible for lower-level tax-financed pension assistance benefits.

Where tax-financed pensions exist, a higher proportion of women than men tend to benefit from such transfers. In most low- and middle-income countries contributory pensions tend to benefit mainly men, while tax-financed pensions benefit mainly women. Although average indicators of coverage may be lower (as in Africa) or higher (as in Europe), a significant gender gap shows up everywhere: in nearly all countries older women are covered to a much lesser extent than older men.

Challenges around disability benefits

- Disability benefits include contributory and non-contributory benefits paid to persons with disabilities with a view to providing income security to reflect reduced earnings capacities and to cover special needs.

Benefits, which provide cash transfers and benefits in kind to provide minimum income security, cover special needs and facilitate access to social services.

- A rising number of beneficiaries of disability benefits has prompted many high-income countries to review their disability benefit policies and to step up their efforts in promoting integration into the labour market encouraging people to remain in work, take up employment or participate in education or training measures; or moving towards integrated working-age benefits for people with or without disabilities.

- In most low- and middle-income countries, contributory invalidity benefits cover only a small proportion of the population, whom rely on social assistance schemes for benefits in cash and in kind, and on access to social services. 

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Adequacy of pensions

- While there is a certain body of knowledge on the extent of old-age pension coverage, information enabling an assessment of the level of coverage exists for only a limited number of countries. But levels of benefit received from the social security pension system are, of course, dependent on resources invested.

In 2050, that proportion will have reached nearly 80 per cent. Some 60 per cent of the elderly population will be living in Asia, with over half in just two countries: China and India. A growing number of low- and middle-income countries have made moves to cope with the challenge. They have either already implemented a basic non-contributory pension scheme (whether universal or income-tested) or are currently discussing the possibilities.

A tryout of the 1980s

- The most common way to accommodate revenue reductions is to cut benefit levels, which often results in added uncertainty for those hardest hit by global and national adjustment processes. The expected turbulences on national labour markets, coupled with the global adjustment processes, may lead to “broken” careers for many people, which along with spells of unemployment or periods of retraining and those affected will most probably face replacement rates that no longer meet the requirements of ILO Conventions.

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Pension finances and the global crisis

- The repercussions will most likely affect people who retire after the crisis. In defined benefit schemes, where pension amounts are calculated without regard to the level of reserves, the immediate impact will be less than in defined contribution schemes where benefit guarantees are less effective by nature.

- Pension funds in many countries have suffered enormous losses during the global crisis, particularly in 2008. In 2009, many pension funds returned to positive nominal investment returns, yet the crisis is likely to continue to weigh heavily on pension finances. While some of the losses incurred during the crisis may be recovered during economic recovery relatively quickly, a complete restoration of pension finances may take many years, as people have lost a number of years of savings due to the financial crisis. Moreover, the crisis has also demonstrated the vulnerability of pension levels in Direct Contribution schemes, notably for people who are close to retirement and whose savings portfolios might not recover during their remaining active life. A further question is whether the accumulation of pension savings in the global markets had considerable impact on the development of asset price bubbles, and hence might have contributed to the new level of benefit uncertainty.

- While some countries have directly tapped into national pension reserves, other countries have modified the regulations of pension funds to give the government a greater say in the investment policy of the fund, which can be used to redirect investments to the national economy.

- Recent pension reforms have rendered pension systems more vulnerable to economic shocks and have shifted financial and economic risks to individuals. This was the case where pension systems were converted into funded defined contributions schemes without putting adequate safeguards in place to protect the future incomes of pensioners.

- If a crisis, or its national spin-offs, turns into a long-term downward adjustment of asset prices, the outcome in Direct Contribution schemes will inevitably be the payment of lower retirement benefits. Any prolonged suppression of interest rates and asset prices will lead to serious difficulties by way of destabilized annuity rates (prices) and management of annuity reserve funds. The size of the long-term effect will depend on the depth and the duration of the downturn in asset prices. Liquidity to ailing national companies and save jobs in the short term, they may expose pension funds to greater risks and jeopardize the sustainability and adequacy of pensions in the long term.

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Extending social security to all using old-age pension

Globally, the theoretical coverage of existing statutory contributory pension schemes should amount to nearly 40 per cent of the working-age population, in practice, however, the effective coverage amounts to no more than 25 per cent of working-age men and women. The need to extend coverage is, therefore, most urgent in developing countries, where formal coverage rates are very low.

The analysis shows a clear dichotomy between developed parts of the world and the developing countries, where effective “retirement” from economic activity is rare.

Figure 5.10 above shows that the link, in terms of inverse correlation, between old-age pension coverage and labour force participation of older people is strong.

Secondly, it may be difficult to count accurately the number of pensions paid (or contingently payable) to women, since, while many women may lack pension entitlements in their own right, they will qualify eventually to receive widows’ pensions. In non-OECD countries, typically only a minority of the elderly receive any pension from formal social security systems.

- The examples above show that globally there is very wide diversity amongst countries of coverage rates for old-age pension benefits, including those that have achieved the highest levels. It leads to the observation that, in fact, the most successful countries in this regard are those that have complemented contributory pension schemes with the introduction of non-contributory pensions, payable immediately so as to reach, if not all of the elderly, then those most urgently in need. A further group of empirical observations concerns the (known) strong gender dimension of old-age poverty.

- In some societies, these problems are certainly exacerbated by social exclusion due to widowhood. Similarly, the global pattern of pension coverage has a strong gender dimension. In most countries, women are under-represented in the formal economy and are, accordingly, proportionately under-represented amongst the contributors to social insurance pension schemes. When women do participate in such schemes, it is often the case that their contributions are made at relatively low rates (because they tend to be employed in poorly-paid jobs) and for fewer years than men in comparable employment (because they interrupt their careers for child-bearing and other care responsibilities), with the overall result that their final pensions are disproportionately low.

- In addition, the annuitization process in pension schemes based on individual savings may result in relatively low pensions for women reflecting their comparative longevity. Other characteristics of pension systems which may, depending on circumstances, be reflected in relatively low average pensions paid to women include the likelihood that their pension rights are derived from those and the difficulty of establishing a satisfactory basis for dividing pension rights in case of divorce.

- In summary, although average indicators of coverage may vary between lower levels (Africa) or higher (Europe), a significant gender gap is observed in all regions: in nearly all countries coverage in old age for women is much lower than for men. It seems likely, given the multiple sources of gender imbalance in contributory schemes, that the overall imbalance could be rectified only through the extension of pension rights to women in non-contributory schemes and those providing universal minimum guarantees.

Excluded groups tend to include in fact not only women, for the reasons already noted, but also low-skilled workers and ethnic minorities.

- The world is ageing. Table 5.3 above shows that, while men and women aged 65 and over now represent 8 per cent of the world population, this figure is projected to increase to 16 per cent by 2050. The majority of the elderly live in countries where, at present, only small minorities are covered by any form of pension schemes and where social security in general, including affordable access to essential health-care services, is a luxury: over 60 per cent of the elderly now live in countries classified by the UN as “less developed”. In 2050 the projections indicate that the elderly in these countries will comprise nearly 80 per cent of the world’s elderly population, of whom 60 per cent will live in Asia, and more than half of whom will be found in China and India alone. The table also shows the predominance of women amongst the elderly in all regions.