Initial Performance of Pension Privatization in Eastern Europe Are Reform Reversals Justified?

Abstract

During first 15 years of their existence, mandatory private pension funds in Eastern Europe have realized rates of return that were lower and more volatile than the corresponding Pay-As-You-Go rates of return, even before the emergence of global financial crisis. Suboptimal investments in domestic government bonds dominated pension portfolios in many countries. Econometric analysis suggests that pension privatization failed to produce anticipated side-effect benefits, such as increased national saving or accelerated economic growth. If pension privatization structural weaknesses are unlikely to be resolved successfully then implementing reform reversals could improve short-term fiscal balance without deteriorating long-term pension sustainability.