Constructing pension infrastructures contributes to the realization of United Nations Sustainable Development Goals (SDGs)
In a rapidly aging world, the importance of pension systems cannot be overstated. They serve as a crucial source of income for old age, contributing significantly to achieving the Sustainable Development Goals (SDGs), supporting economic growth, and fostering financial sector development. However, penetration of pension schemes, particularly in low-income and lower-middle-income countries, remains a challenge.
Financial incentives have emerged as a potential solution to this problem. These incentives can take various forms, such as co-contributions, insurance benefits, or cheaper loans, designed to entice workers to participate and save regularly. The international donor community is suggested to fund these incentives where political will or local resources are insufficient.
Countries like Mexico, Colombia, and Kenya have recently introduced involuntary pension systems for informal sector workers, aiming to extend social protection. For instance, Mexico's Universal Pension program and Kenya's Mbao Pension Plan have increased coverage, although challenges remain in enrollment and contribution consistency.
Building and strengthening funded pension systems has transformative potential in achieving the SDGs, as detailed in a recent paper. However, the effects on domestic stock market development and economic growth require a well-designed system tailored to country-specific conditions. Over time, a local base of institutional investors will form, managing a growing stock of domestic long-term capital.
The benefits of financial incentives are clear. Workers would benefit from additional savings for retirement and direct aid benefits. Understanding what works best in a country-specific context is crucial when implementing these incentives. Local conditions, including strong governance and institutional capability, play an important role in the positive effects of funded pensions and economic growth.
However, it's important to note that not all pension schemes targeted at informal sector workers offer financial incentives. Supporting pensions does not necessarily require increased aid volume; assets from long-standing aid programmes could be partially transferred to pension funds.
As the world braces for a future where 80% of people aged over 60 are projected to live in low and middle-income countries, where pension coverage is currently low, innovative pension solutions are needed to reach the informal sector. Currently, 58% of total employment is in the informal sector globally, and the figure is much higher in low and lower-middle-income countries.
Pension funds today play a key role in the financial systems of many developed countries, including the UK, US, Singapore, Canada, Australia, Denmark, and the Netherlands. As we move forward, it's crucial to ensure that these benefits are extended to all, regardless of their employment status or income level.
Unfortunately, the UN's 2030 SDGs require an estimated $4 trillion of additional annual investment in developing countries. Cuts to USAID and other development agencies make it unlikely that this investment will be found. Financial incentives, therefore, become even more crucial to promote participation in pension schemes, particularly for informal sector workers.
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