By Peter R. Orszag (Sebago Associates, Inc.) and Joseph E. Stiglitz (The World Bank). Presented at the conference on "New Ideas About Old Age Security" The World Bank Washington, D.C. September 14-15, 1999.
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Averting the Old Age Crisis, the World Bank's path-breaking publication on pensions, trenchantly notes that "myths abound in discussions of old age security."3 This paper examines ten such myths in a deliberately provocative manner. Our hope is not only to spur debate during this "New Ideas About Old Age Security" conference, but more broadly to ensure that policy-makers understand the complexity of pension reform.

It is testimony to the power of Averting the Old Age Crisis that many of today's myths at least partially emanate from that report's unmasking of yesterday's. Yet the rejection of one extreme is not the affirmation of the other, and the pendulum seems to have swung far, perhaps too far, in the other direction. The complexity of optimal pension policy should caution us against believing that a similar set of recommendations would be appropriate in countries ranging from Argentina to Azerbaijan, from China to Costa Rica, from Sierra Leone to Sweden. We are reminded of the joke about the professor who kept the same questions each year but changed the answers. Ironically, that joke may offer us some sound guidance. In response to the question "What should we do about our pension system?" we should be wary of offering a single answer across the globe.

The answer to "what should we do about our pension system?" is also unlikely to be "nothing." The problems that have motivated pension reform across the globe are real. In many developing countries, soaring deficits -- gaps between pension fund obligations and revenues -- not only threaten economic stability, but also crowd out necessary investments in education, health, and infrastructure. Too often, the benefits of pension programs have accrued to those already privileged; forcing poor farmers to finance the largesse of the urban elite is surely not sound economic policy. Furthermore, the structure of the pension programs in many cases has served not only to undermine macroeconomic stability, but also to weaken the functioning of labor markets and to distort resource allocations. In other words, reforms have been and are needed. And while countries may be able to muddle through in the short run, averting a crisis in the long run will not be so simple.

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