One way of sharing national wealth

 PRIME Minister Peter O’Neill’s announcement of a pension scheme and a national service scheme next year is commendable.

While he did not elaborate, we envisage that both proposals have been in the pipeline and it is not just election talk.

O’Neill said the pension scheme would cater for every individual over 65 years and every person living with a disability in the country.

The scheme, which the prime minister announced during the launching of former Kairuku-Hiri MP Paru Aihi’s by-election campaign last weekend, sounds like a universal old-age pension plan that is common in many developed countries.

In developing countries or Third World economies such as Papua New Guinea, superannuation funds are more common and have been in existence for decades.

What is a universal pension scheme and is PNG ready to implement it?

In the last century, with industrialisation and economic development, certain demographic changes have been observed in the world. 

Mortality rates have reduced drastically in the higher age groups, leading to an increase in life expectancy. 

This has been followed with a comparatively lower birth rate, and thus the old age dependency ratio has increased over the years. 

This phenomenon is commonly referred to as aging and it has certain economic implications on a country, like increase in pension and health expenditure. 

Old age social security plays a pivotal role in a welfare state and one of its major components is pension. 

Developed countries generally provide pension to those who contribute for pension whereas in the majority of developing countries pensions are provided on a discretionary basis, which reduces the overall coverage of pension. 

There are certain types of pension. 

Among these, a non-contributory, basic pension can guarantee that all residents of a country, regardless of earnings or occupation can have a regular income in old age. 

A non-contributory pension caters to the workers in the informal sector by separating the link between contributions and retirement income. 

In general, pensions are welfare schemes that provide some amount of financial resources to residents after a stipulated age or service. 

Specifically, pensions are periodic payments that start when somebody retires and continues until death. 

Thus, a pension provides a long-term income security in old age. 

Pension schemes not only serve the purpose of consumption smoothening but provide insurance to longevity risk and reduce old age poverty. 

Modern pension systems are recent inventions and originated in the United Kingdom. At the beginning of the twentieth century, state and occupational pension schemes emerged in many developed nations. 

Currently, the World Bank promotes a five-pillar system for post-retirement protection. This kind of framework is sometimes used to define pension fund architecture. 

The five pillars are Pillar Zero: Non-contributory social pension and assistance (universal or means-tested) for poverty alleviation; Pillar One: A publicly managed, tax-financed social safety net; Pillar Two: A mandatory, privately managed, fully funded contribution scheme; Pillar Three: voluntary personal savings and insurance; and Pillar Four: Informal support (e.g. family support), other formal social programmes (eg health care and/or housing), and other individual financial and non-financial assets.

The World Bank’s Pillar Zero seems to be the appropriate mechanism for Papua New Guinea to adopt and refine to suit is particular purposes, if the government planners have not already done so. 

Hopefully, the financial planners have considered the funding aspects of a universal pension scheme and factored that into the 2014 budget and beyond. 

Money should not be an issue with the start of production of liquefied natural gas by the end of 2014 and other major resource projects coming on stream over the next few years.

After all, a national pension scheme can be one way of insuring the wealth of nation is distributed among all the people.