The Unfunded Promise: Ageing, Informality, and the Pension Squeeze
Key Takeaways
- The global dependency shock: OECD countries will see 52 people aged 65 plus for every 100 working age adults by 2050, up from 33 in 2025. Ten countries including Japan, Korea, Italy, and Spain will see working age populations drop by more than 30 percent over the next 40 years.
- Fiscal pressure accelerates: without corrective action, fiscal stress from aging will increase by 6.25 percentage points of GDP between 2024 and 2060 in the average OECD country, with aging accounting for more than 40 percent of total fiscal pressure.
- Informality is the Global South detonator: in Africa, 80 percent of the labour force works informally. The informal sector contributes 55 percent of GDP but generates minimal pension contributions. In Latin America, the informal sector accounts for 80 percent of all new jobs created.
- Migration changes the equation twice: it removes contributors at home, then sustains households through remittances which can disguise domestic system failure and delay reform.
- Reform is possible without cruelty: credible sequencing combines targeted protection for the poorest elderly with slow, transparent parametric changes that widen contribution bases and raise productivity.
The pension trap is not that societies are ageing. The trap is that governments promise stability through pensions while running economies that cannot finance those promises. The result is a slow collision between demography and public accounts. It does not arrive as a dramatic default. It arrives as a tightening: less fiscal space for health, for schools, for water systems, for ports, for resilience. The state becomes a cashier for yesterday, not an investor in tomorrow.
In advanced economies, pension stress is managed through a mix of high productivity, deep capital markets, broad formal employment, and long established contribution systems. Global pension assets reached $70 trillion at the end of 2024, with asset backed pensions exceeding 100 percent of GDP in eight OECD countries. In much of the Global South, the ingredients are different. Formal employment is limited. Wages are low. Life expectancy is rising. Families are smaller. The tax base is narrow. Governments still subsidise essentials. Debt service is rising. Under those conditions, a universal pension promise becomes a fiscal machine that grows even when the economy does not.
When dependency ratios double in a generation
The old age dependency ratio, defined as the number of people aged 65 plus per 100 people of working age 20 to 64, has more than doubled in the OECD area between 1960 and 2022. The population aged 65 and over grew at an annualised rate of 2.2 percent during the period, while the working age population grew by merely 0.9 percent. This gap is widening. OECD projections show that by 2050, there will be 52 people aged 65 plus for every 100 people aged 20 to 64, up from 33 in 2025 and only 22 in 2000.
The increase by 2050 is particularly severe in Korea, by almost 50 points, and in Greece, Italy, Poland, the Slovak Republic, and Spain by more than 25 points. Ten countries including Estonia, Greece, Italy, Japan, Korea, Latvia, Lithuania, Poland, Slovakia, and Spain will see their working age populations drop by more than 30 percent over the next 40 years. With the working age population estimated to fall by 13 percent over the next four decades across the OECD, GDP per capita is expected to drop by 14 percent by 2060 as a result. Countries will face downward pressure on revenues while spending on aging related expenditures climbs.
Global life expectancy at birth now averages 73.5 years, extending pension payout periods. The normal retirement age will increase in the average OECD country from 64.7 and 63.9 years for men and women retiring in 2024 to 66.4 and 65.9 years respectively for people starting their career in 2024, based on current legislation. Future normal retirement ages range from 62 in Colombia for men, Luxembourg, and Slovenia to 70 years or more in Denmark, Estonia, Italy, the Netherlands, and Sweden.
Yet these increases may not be enough. According to OECD analysis, fiscal pressure from population aging could increase by nearly 6.25 percentage points of GDP between 2024 and 2060 in the absence of corrective policy action, with aging accounting for more than 40 percent of total fiscal stress. This pressure comes from three sources: pensions, healthcare, and long term care. While public spending on long term care as a share of GDP is generally low, it has been rising more rapidly than pension and healthcare expenditure over the past decades and will continue to do so, especially as the share of population 80 years and over increases rapidly.
Three models, three failure modes
There are only three ways to pay pensions at scale. You can fund them through contributions, which requires broad formal work and enforceable compliance. You can fund them through returns on accumulated assets, which requires a funded scheme and credible governance. Or you can fund them through the budget, which means taxes, borrowing, or money creation by another name. Many states use a blend. The trap appears when the mix drifts silently toward the third option.
Ageing does not just increase the number of pensioners. It changes the dependency balance. Fewer workers support more retirees, while the same state is asked to finance education, health, and infrastructure for everyone else. Full career average wage workers entering the labour market in 2024 can expect net pensions equal to 63 percent of net wages on average across OECD countries. This future net replacement rate falls below 40 percent in Estonia, Ireland, Korea, and Lithuania. In an import dependent economy, pension consumption also increases foreign exchange pressure, because consumption remains high while investment in productivity lags.
| Model | What it requires | What fails first in Global South states | Coverage reality |
|---|---|---|---|
| Contribution based (pay as you go) | Broad formal employment, payroll compliance, stable job tenure | Informality and weak enforcement shrink contribution base. In Africa, 80% of labour force works informally. In Latin America, informal sector is 80% of new jobs. | Only 17.4% of Africa's population effectively covered by at least one social protection benefit. Of 47 African countries with contributory schemes, 32% did not cover self employed in 2019. |
| Funded scheme (defined contribution) | Credible governance, investment discipline, deep capital markets, long time horizons | Political capture, shallow markets, trust deficits reduce participation. Eight Latin American countries converted to funded schemes by 1998 but evasion persists. | Pension assets in emerging economies lag developed markets. OECD countries hold $70T in pension assets (2024), emerging markets hold hundreds of billions but coverage remains limited to formal sector. |
| Budget financed (universal/social pensions) | Tax capacity, fiscal space, stable debt dynamics, political sustainability | Debt service, subsidy burdens, currency pressure compress fiscal space. Tax revenues as low as 7-8% of GDP in many developing countries. | Social pensions cover ~35% of population 60+ in Europe, East Asia Pacific, Latin America, South Asia. Coverage much thinner in Sub Saharan Africa and parts of Middle East. |
When 80 percent of workers never contribute
In the Global South, informality is often discussed as a labour market defect. For pensions, it is the central structural fact. According to the International Labour Organization, two billion of the world's employed population aged 15 and over work informally. For Africa, 85.8 percent of total employment is informal. The informal economy contributes about 55 percent to Africa's GDP and employs 80 percent of the labour force, yet contributes minimally to pension systems because workers lack payroll documentation, stable employment records, and often earn below enforcement thresholds.
The level of informality ranges from 20 to 25 percent of GDP in Mauritius, Namibia, and South Africa to a high of 50 to 65 percent in Benin, Nigeria, and Tanzania. The agricultural sector, which predominantly employs seasonal workers informally, remains a high proportional contributor to GDP for most African countries but generates almost no pension contributions. In Latin America, the informal sector is not only large but growing, accounting for 80 percent of all new jobs created. This creates a vicious cycle: informality prevents contribution based systems from functioning, which increases pressure for universal budget financed pensions, which strains fiscal capacity and crowds out productive investment, which perpetuates low productivity and informality.
This creates political pressure for universal old age support, because without it, elderly poverty becomes visible and morally difficult. Universal pensions can be humane and stabilising. Social pensions now cover approximately 35 percent of the population ages 60 years and older in OECD countries and in the Europe and Central Asia, East Asia and Pacific, Latin America and Caribbean, and South Asia regions. But if they are financed in a way that hollows out the state's capacity to build the future through infrastructure, education, and productivity investments, they become a kindness that slowly weakens the society that needs kindness most.
Informal work means irregular contributions. It means fragmented employment records. It means weak payroll enforcement. It means retirement without a predictable income stream, except family support, property, or informal savings. In other words, informality already produces a pension system. It is just a household based system, not a national one. The result is that pension contributions outside of the public sector are intermittent and relatively low, and the standard narrative across the continent is of a small percentage of the population in formal employment for whom social security is possible.
When 26 percent of the budget locks into pensions
Mauritius is often treated as an exception in the region, a relatively strong state with a long record of stability, competitive governance, and diversified economic base. That is precisely why it matters as a warning signal. If pension arithmetic is stressing a capable state with low informality (20 to 25 percent of GDP), the signal for weaker states with 50 to 65 percent informality is louder, not quieter.
According to the Mauritius Budget Speech 2025 to 2026, the Basic Retirement Pension equals 26 percent of recurrent budget. This represents a single pension line, not total aging related expenditure including healthcare and long term care. The government is raising the eligibility age from 60 to 65 over five years, reflecting rapid aging pressure in a middle income country with declining fertility and rising life expectancy. The reform is not ideological. It is operational. It is the difference between maintaining public services and letting them decay through fiscal strangulation.
When a single pension line reaches a quarter of recurrent spending, reform stops being about ideology and becomes about survival. It becomes the difference between financing ports, hospitals, energy systems, and climate adaptation, or living off maintenance budgets and emergency borrowing. Mauritius has therefore begun the difficult shift of acknowledging the arithmetic rather than pretending it will be solved by growth alone. The lesson is not that pensions should be cut cruelly. The lesson is that pension design must match institutional capacity and economic structure. Otherwise the pension becomes a development ceiling that prevents the investments required to escape the trap.
When the young leave and the old stay
Migration reshapes pension arithmetic through two channels. First, it reduces the domestic contributor base, because working age people leave. In some European systems, immigrant contributions comprise approximately 15 percent of pension inflows, cushioning the fiscal impact of aging domestic populations. In the past five years, almost 90 percent of the 1.6 million new jobs subject to social security contributions in Germany were filled by immigrants. Without this migration, Germany's pension system would face even more severe stress.
For sending countries in the Global South, the dynamic runs in reverse. Working age contributors emigrate, shrinking the tax base and contribution pool. Yet the political urgency to fix structural pension weakness declines because remittances stabilise household consumption and supply foreign exchange to banking systems. The state sees fewer contributors but fewer immediate crises, because families are being subsidised privately from abroad. In some countries, remittances are so large they function like an informal stabilisation fund. Banks receive forex, imports keep moving, consumption holds up.
The pension trap then deepens quietly. The pension promise keeps growing while the economic base that should support it keeps shrinking. Politicians can postpone reform because the immediate crisis is averted by remittances, even as the long term sustainability deteriorates. This creates a dangerous equilibrium: households survive through diaspora support, governments avoid painful reform, and the structural capacity to build a self sustaining pension system never develops. Eventually, either the remittance corridor weakens (host country recession, deportation, currency crisis) or the demographic pressure becomes so severe that delayed reform becomes crisis reform.
What countries are trying and why it is hard
Several African countries including Rwanda, Nigeria, Kenya, Ghana, South Africa, and Uganda are at various stages of crafting inclusive and affordable micro pension schemes targeting their large informal sector workforce. Nigeria's PenCom wants to cover 30 percent of the working population under the Contributory Pension Scheme by 2024 through its Micro Pension Scheme launched in March 2019. Côte d'Ivoire made a significant reform in March 2020 by extending mandatory coverage to the self employed and informal sector workers, setting up a special Social Security Scheme for Self Employed Workers as part of its strategy to reach 50 percent social protection coverage by 2025.
Zambia in 2019 issued reforms extending coverage to informal self employed persons under a voluntary social insurance programme, where contributions can be made flexibly on a daily, weekly, monthly, or yearly basis. The benefit package was specifically designed for five target groups: domestic workers, bus and taxi drivers, sawmill workers, small scale farmers, and marketeers and traders. Egypt and Morocco have undertaken similar initiatives to expand coverage to difficult to reach groups.
The challenge is implementation. Voluntary schemes struggle with take up because informal workers face immediate cash flow constraints and distrust government managed funds. Mandatory schemes for informal workers are difficult to enforce without payroll infrastructure and compliance mechanisms. Mobile money penetration in Africa, where several countries have seen rapid digital adoption, offers a potential enrollment and contribution mechanism, but trust remains fragile. The informal sector is heterogeneous, including not only poor populations but also higher income self employed groups with financial capacity to save. For this group, the main challenge is the absence of savings schemes customised for their needs and credible enough to compete with informal savings mechanisms.
How to reform without breaking the social contract
Pension reform fails when it is presented as punishment. It succeeds when it is presented as continuity, a way to preserve protection by changing the financing and eligibility so the protection remains real. The goal is not austerity. The goal is credibility. The Allianz Global Pension Report 2025 assigns an overall pressure score of 3.7 to all pension systems analyzed, signaling continued high pressure to reform. A small group of countries such as Denmark, the Netherlands, and Sweden score well below 3 because they embraced funded systems in good time. Japan took a different approach: working longer. Even today, one third of 65 to 70 year olds in Japan are still in employment, and the effective retirement age is expected to rise to 70 in coming years.
By far the larger group consists of countries with scores below 4 where urgent reform is needed. This includes many developing countries such as Malaysia, Colombia, and Nigeria. Their problem is often not the design of the pension system per se, but its limited reach: the share of informal employees who are not covered is usually over 50 percent. In these countries, far reaching labour market reforms are needed first to create the basis for a comprehensive pension system. Otherwise, the pension system becomes yet another factor increasing inequality between those with formal employment access and those without.
A credible reform sequence
- Make the ledger visible: publish the full pension cost, demographic assumptions, and ten year projections in plain language. Include aging related health and long term care costs to show total fiscal pressure.
- Protect the vulnerable first: maintain basic support for the poorest elderly households through targeted top ups that are audited and reviewable. Means testing must be administratively light to avoid excluding the poorest.
- Adjust parameters gradually: move eligibility age and indexation rules slowly, transparently, with clear transition paths announced years in advance. Mauritius' five year transition from 60 to 65 provides a model.
- Widen the contribution base: simplify compliance for small firms, enforce payroll registration digitally, expand coverage for self employed and informal workers through flexible contribution design using mobile money infrastructure.
- Build funded credibility: strengthen governance, ring fence assets, publish investment rules, stop treating pension funds as political liquidity. Several African countries have begun separating pension fund management from political interference.
- Raise productivity as pension policy: pensions cannot be solved by accounting alone. The real solution is higher output per worker so the tax base can breathe. Infrastructure, skills, competition policy, and export diversification are pension policies.
- Leverage technology: Africa's high mobile telephony penetration and digital adoption can tackle enrollment challenges. Kenya's Mbao Pension Scheme and similar initiatives demonstrate mobile enabled micro pensions can work.
- Address the gender gap: women receive monthly pensions 23 percent lower than men's on average across OECD countries, down from 28 percent in 2007 but still severe. In the Global South, lower female labour force participation compounds this gap.
Done well, this sequence can reduce fiscal stress while preserving dignity. According to OECD calculations, the pension savings gap for younger generations in the eurozone alone is around €350 billion per year on average. That sounds insurmountable, but it is bridgeable if the savings rate were to rise by a quarter. But the ledger has two sides. Retirement savings must be invested profitably in future growth and innovation. This is the key to overcoming demographic change and climate change simultaneously. Pension funds with $70 trillion in assets globally are the largest investors in capital markets. Their allocation decisions determine whether economies build productive capacity or chase yields in unproductive assets.
Choosing dignity without choosing decline
Every society must decide how it treats age. The Global South does not have the luxury of postponing the decision, because the demographic shift is arriving while the development project is still unfinished. With 59.8 percent of Africa's current population under age 24 and only 3.4 percent currently aged 65, current policies may be lulled into a false sense of security. But this youthful cohort will represent a sizeable elderly population in coming decades. By 2060, the global population of those aged 60 plus will reach approximately 2.3 billion, more than double current levels, with Africa contributing 300 million, up from 74 million today.
Pension systems therefore become the test of maturity. Can a state protect the elderly without consuming the future of the young. Can it finance dignity without becoming a permanent subsidy machine. Can it be honest about the arithmetic without becoming cruel. The pension trap is avoidable, but not through denial. It requires a clear ledger, a slow and credible transition, and a deeper commitment to productivity as social policy. When a society treats pensions as a slogan, it eventually pays in instability. When it treats pensions as a contract that must be financed honestly through a mix of contributions, productive investment of pension assets, and targeted support for the poorest, it earns something rare in modern politics: legitimacy that survives time.
The alternative is visible in the fiscal stress already emerging. OECD countries face 6.25 percentage points of GDP in additional fiscal pressure by 2060 from aging alone. Developing countries with thin tax bases, high informality, weak governance, and limited capital markets face even more severe constraints. When pension promises collide with fiscal reality, governments choose between inflation (eroding pension value through money creation), default (explicit failure to pay), or austerity (cutting other services to preserve pensions). All three paths destroy trust. The only sustainable path is the one that treats the pension promise as a contract to be redesigned transparently, gradually, and honestly before crisis forces degradation.