Summary: The pension and old age security systems that originated in Europe in the nineteenth and twentieth centuries have been effective in sharply reducing poverty rates among the elderly throughout Europe. However, in many countries of the Europe and Central Asia (ECA) region, these systems now comprise the single largest expenditure item in the government budget. Current demographic trends in the region, however, suggest that further reforms will be needed. This report presents the historical evolution of pension systems in Europe, showing how policy makers were able to use the expanding population pyramid, with large younger cohorts and small older cohorts to expand the coverage and increase the generosity of pension systems. Levels of benefits were increased and the duration of retirement increased over time, making pension systems more expensive, with each generation receiving more generous benefits than the generation before. This report focuses on the impact of the break in this demographic evolution, whereby the prognosis for the future population structure is likely to resemble a column or even an inverting pyramid, with smaller cohorts of working age population expected to support larger cohorts of elderly retirees. Despite the demographic challenges, ECA countries do not have to roll back the progress they have made in reducing poverty among the elderly. Changes in pension policy will need to be accompanied by policies to increase labor market flexibility so as to encourage older workers to remain in the work force. Such policies include incentives for employers to provide lifelong learning and training specifically geared to older workers, and make workforce adaptations which allow older workers to retain a high level of productivity. Governments may also need to re-examine the efficiency of their revenue administration systems to help finance not just pensions, but all other societal needs. This report goes into each of these accompanying policies, but concludes that none of these by itself can address the impact of the demographic challenges that are underway. A combination of policies will be required to effectively face the challenges. The report concludes that the inverting population pyramid clearly presents challenges to the provision of old age security, but consistent policy choices to return the pension system to parameters similar to those in the 1970s can result in sustainable systems of old age security.
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