Pension Schemes -Pay as You Go Schemes

Topics: Pension, Retirement, Cash balance plan Pages: 10 (3262 words) Published: December 13, 2012
According to Robert Palacios (2006), civil servants and other public-sector employees — in the military, education, publicly owned enterprises etc. were often among the first groups of workers to be covered by government-sponsored pension schemes. In a handful of countries such as Bangladesh, Bhutan, Botswana, Eritrea, Lebanon and the Maldives public-sector employees are still the only group covered by a formal pension scheme.

The rationale for providing pensions for government employees was somewhat different from that behind the creation of national pension schemes. Among the objectives particular to schemes for government workers were the following: • securing the independence of public servants;

• making a career in public service attractive;
• shifting the cost of remunerating public servants into the future; and • retiring older civil servants in a politically and socially acceptable way. When mandatory pension coverage was expanded to the private sector, there often seemed little point in including civil servants — who already had their own arrangements — in new national schemes. Civil servants have also proved powerful in protecting their own financial interests. Furthermore, while civil-service pension schemes share some of the social-policy goals of national pension programmes, they must also accommodate the government’s human-resources policy as an employer. For these reasons, special retirement-income schemes for the public sector have often persisted. The issue of ‘dualism’— whether civil-service schemes are integrated with national schemes covering private sector workers or are separate — is a central policy question in those countries where parallel systems remain.

According to Gordon L. Clark (2005), increased longevity and the imminent retirement of the post-war baby-boom generation have undermined the financial viability of state pensions based on Pay- As-You-Go (PAYG) principles. Funding pensions from the public finances is increasingly problematic, believed by many policy analysts to be economically unsustainable. With people living longer than expected, many governments will have to absorb huge pension liabilities—that were unbudgeted for— and which are expected to climb further given that it guarantees pension payments from the taxes it collects every year (Global action on Aging, 2007).

In Britain, over the last two decades, pension reforms have focused on the recalibration of the division between public and private responsibility for old age security, to contain future state liability in this area (Whiteside, 2003). According to a treasury memo in Britain, 1960 the growth of private pension schemes is to be encouraged; it produces social stability. In the long run, moreover, it should reduce the individual’s dependence on the Government scheme and perhaps even enable the Government to get away from the expensive doctrine of ‘universality’—and perhaps lead to the adoption of benefit payments according to need.

An increasing number of African countries have recently initiated reform of their pension and social protection systems. Over the last decade, Kenya has also undertaken a major reform of parts of its pension system. Whereas the primary motivation for reform of pension systems in many countries worldwide has been to address the growing fiscal burden of pension liabilities, in Kenya the major driver for reform was to strengthen the governance, management and effectiveness of the existing pensions system.

The pay as you go scheme is the pension scheme which usually covers the civil servants in the various ministries and government institutions of various countries. This pension scheme is usually largely unfunded as it is usually a non contributory form of pension scheme. Raichura (2008) shows that the provision and management of retirement benefits for public service employees are governed under a Pensions...
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