Who “Benefits” from Pensions in Developing Economies

 

Pensions are typically in the form of a guaranteed life annuity, thus insuring against the risk of longevity. In normative terms, all members of a scheme are intended to benefit from pensions. However, the general reality in many developing economies makes the need for pensions a rhetoric and a mere transplant of a foreign ideal, ignoring the under-currents of real welfare needs. For instance, life expectancies in many developing economies are substantially low, and many pension scheme members may not live to enjoy the benefits of pensions. According to the UNDP Human Development Report 2013, the Sub-Saharan Africa life expectancy average as at 2012 is 54. 9 years, 64.6 years in Ghana, 57.5 years in Kenya and 52.1years in Cameroon. Noting that compulsory retirement age in most developing economies is around 60 years upon which retirement benefits are paid, pension schemes may be unnecessary.  Thus, pensions are unreachable and a mirage to many. The majority of those who survive after retiring at 60 years are normally expected to demise shortly. In that case, such people may have contributed for over two decades, sometimes four depending on when a person is employed; yet enjoys meagre pensions for usually less than a decade as reported in many developing economies. In Ghana, future pensioners born in 2012 are expected to demise at age 64; hence, receive pensions for a likely four years.

 

At the group level where people can be classified by income, the insignificance of pension schemes is further perpetuated in many liberalized developing economies. It is widely observed that low and middle-income people have low life expectancies compared with high-income people all things equal. Very often, high-income people have access to resources to live a high standard of life and for that matter longer. This includes access to systems and life enhancing information, which low and middle-income people predominantly lack. Moreover, the nature of pension schemes favours high-income contributors, as benefits are mostly directly linked with the contribution rate. In other words, many low and middle-income people can only afford to contribute little and consequently earn little pensions upon retirement, which in most instances is devalued by high inflation. This is the case in many developing economies. Moreover, the fact that pensions are periodic payments unlike lump sums to be received commencing upon retirement expands the risk that many low and middle-income people in developing economies would not received pensions –  I refer to this as the “Retirement Planning Puzzle”.  This pushes the receipt of pensions further into the uncertain future. Unlike developed economies with high life expectancies making pensions important, low life expectancy in developing economies render the need for pensions unjustified.

 

Kenneth Appiah Donkor-Hyiaman

MPhil Planning Growth and Regeneration

Department of Land Economy

University of Cambridge