By Robert HolzMann and Robert Palacios –

The trend toward including individual accounts as part of the mandatory pension system continues unabated. Nine Latin American countries have introduced individual accounts (Chile, Peru, Argentina, Colombia, Uruguay, Bolivia, Mexico, El Salvador and Nicaragua) and several more are preparing to do so (Ecuador, Dominican Republic) A similar trend has emerged in Europe where the former socialist countries are taking the lead: Hungary, Kazakhstan, Latvia and Poland have already passed reform legislation and many others including Croatia, Estonia, Macedonia, Romania and the Ukraine are preparing their own versions. There is also movement in this direction in Western Europe, even in countries with large, state defined benefit plans like Sweden. Several Asian versions of the individual accounts strategy are also emerging, ranging from the gradually liberalization of Singapore’s Central Provident Fund to Hong Kong’s new, employer based, defined contribution scheme. In fact, reforms that assign an important role to individual accounts are being discussed in dozens of countries in every region of the world.

Some observers consider such a reform approach as a shift away from a social insurance concept, and the tacit solidarity across and within generations. A discussion about individual accounts versus social insurance has recently taken center stage again in the US with the proposals to replace part of the existing unfunded, defined benefit scheme with prefunded, defined contribution accounts. But in many ways, the US discussion is of little relevance for most countries. The fiscal sustainability problem pales in comparison to most other advanced economies, coverage is practically universal and private pensions are well developed and play a healthy role in that country’s capital markets. Contribution rates for pensions in many European and even a large number of developing countries are double those in the US. In short, the potential social and economic gains of systemic reform are much greater in the rest of the world. This is especially true in poor countries, where the costs and inequities of “traditional’ public pension schemes have led to their demise and low credibility.

This brief note states the broad arguments for individual accounts.’ The structure of the paper is as follows: Section II provides some needed clarification on “individual accounts”, Section III outlines the main arguments for individual accounts while Section IV concludes

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