Expanding Pension Coverage in LMICs: A Crisis of Informality and Aging Populations

The World Bank-led study reveals that rising old-age dependency in LMICs, combined with widespread informality, threatens pension sustainability. It urges integrated reforms addressing financial incentives, behavioral barriers, and trust to expand pension participation and protect aging populations.

In an ambitious study led by the World Bank’s Development Research Group, in collaboration with IZA (Institute of Labor Economics), Queen Mary University of London, the Japan International Cooperation Agency (JICA), and the University of Tokyo, researchers take a sobering look at the challenges facing pension systems in low- and middle-income countries (LMICs). As these nations age faster than ever before, many are finding themselves “old before rich,” with ballooning old-age dependency ratios and pension systems ill-equipped to handle the shift. The study argues that unless both contributory and non-contributory pensions are urgently reformed, fiscal sustainability and elderly welfare will be increasingly at risk. The document draws on a rich body of empirical and theoretical literature, revealing that both financial and non-financial factors shape people’s participation in pension systems.

When Family Isn’t Enough: The Role of Pensions as a Safety Net

As traditional multi-generational households dwindle due to urban migration and shrinking family sizes, older adults in LMICs are increasingly vulnerable. Historically, family support—whether through financial transfers, shared housing, or caregiving was the norm. But with fewer children and more nuclear households, this safety net is wearing thin. Pensions can provide a critical cushion, yet their impact varies. The study finds that while formal pensions partially reduce private transfers from children to elderly parents, they rarely eliminate them entirely. Instead, they serve as essential insurance when family support falters. In South Africa and rural China, for example, pension benefits helped reduce poverty without fully replacing familial aid. Interestingly, pensions also influence broader family dynamics, like reducing son preference, shifting co-residence patterns, and even reshaping fertility and child investment decisions. Evidence from China’s New Rural Pension Scheme showed that with increased pension security, parents invested more in daughters' futures, suggesting that pensions can subtly rewrite long-standing cultural norms.

Pensions vs. Informality: A Tug-of-War in Labor Markets

One of the most persistent barriers to expanding pension coverage in LMICs is the sheer scale of labor informality. In these environments, workers often choose jobs that are not registered with government systems, either to evade payroll taxes or due to a lack of formal job opportunities. For many, contributing to a pension scheme remains a voluntary decision—one that can be financially unappealing. Structural models from countries like Chile and Peru show that even modest increases in payroll contribution rates can push workers away from the formal sector. For instance, a rise in contribution from 10% to 16% led to a significant decline in formal employment. These models also suggest that overly generous non-contributory pensions can disincentivize formal participation, eroding the link between effort and reward. Yet the issue is far from binary. Worker mobility, career unpredictability, and household preferences mean that responsiveness to pension rules is uneven across demographics. The paper underscores that designing pension programs without accounting for informality will inevitably fall short.

Beyond Numbers: The Human Barriers to Enrollment

Even among those willing to contribute, a host of behavioral and logistical hurdles make pension participation difficult. The study highlights how administrative complexity, poor awareness, and financial illiteracy severely dampen enrollment. In India, field experiments showed that helping elderly women navigate the application process increased participation by over 40 percentage points. In Mongolia, simply informing people how to make mobile contributions raised payments significantly, especially in remote areas. Other trials showed that personalized SMS reminders, simplified digital tools, and visual demonstrations about compound interest can meaningfully improve participation, although such effects often fade over time. A consistent pattern emerges: people are more likely to engage when pension information is specific, tailored, and easy to understand. Social networks also matter. Peer influence, particularly in rural communities, can be more persuasive than top-down messaging. When neighbors or family members join, others follow. Still, the authors stress that many behavioral interventions only work at the margins and need to be scaled smartly.

Trust: The Missing Currency in Pension Systems

Perhaps the most intangible, yet powerful, barrier to pension participation is trust or the lack of it. In several LMICs, skepticism about government reliability and pension system solvency is high. Public dissatisfaction has sparked protests, like those in Chile in 2019–2020, and contributed to low youth enrollment in state programs in China. People are reluctant to invest in a long-term system they believe may collapse or fail to deliver. Encouragingly, the study finds that trust can be nudged. In Mongolia, telling people that international pension experts were helping strengthen national systems increased participation. These results suggest that transparency and credibility, not just technical reforms are crucial. Building trust won’t happen overnight, but it’s essential for long-term system viability. Moreover, countries must consider how pensions interact with broader social protection efforts, from health insurance to disaster risk programs, especially as climate shocks and economic volatility rise.

In sum, the paper makes a compelling case that while financial incentives matter, they are just one part of a much larger equation. LMICs must adopt a holistic approach that integrates sound policy design, behavioral insights, and trust-building strategies. With the right mix of reforms, even informal workers, who have long been left out of pension systems, can be brought into the fold. As work becomes more fragmented globally, with gig jobs and self-employment on the rise, the lessons from this study may soon apply well beyond the Global South. The future of pension systems everywhere may depend not just on economics, but on empathy, inclusion, and innovation.