public provision of pensions are weak as long as public pensions serve as a pure safety net (subsistence level of support) for people in long-term poverty and unable to save, and as insurance against failures in the capital and insurance markets and in personal asset management. The effects of the mere existence of a public pension scheme on private saving are ambiguous (see Box 1). 3 There is no evidence that the replacement of a PAYG system by other forms of provision for retirement would significantly boost national saving. An IMF study concluded that there is "no strong theoretical argument or compelling evidence for the view that the replacement of a PAYG defined-benefits public sector plan by a definedcontributions plan along the lines of the Chilean system will increase aggregate saving. ... Similarly, there is no compelling reason to believe that the addition of a second tier in the form of a defined-contributions plan to the public system should increase saving" (1 996b).<sup>4</sup> Analysis of the fiscal effects of an aging population by the IMF (1996a, b) and the World Bank (1994) has suggested that governments should gradually shore up the existing PAYG systems while shifting more responsibility for provision for retirement to the private sector. Countries with small pension schemes in place have been advised to move toward fully funded systems as part of a comprehensive reform policy to develop a multi-pillar pension system.<sup>5</sup> For countries with large public pension 3 Other arguments concerning public provision for retirement relate to the relative depth of the domestic capital market, possible misallocation of capital (if the government attempts to pre-fund its future pension expenses), high taxes (if public pensions are generous, the population is aging and the PAYG system is maturing), tax evasion (if taxation is high and the link between taxes and the pension benefit is blurred), large deficits (if rising old-age and system-dependence ratios increase expenses on pensions, health and welfare), and excessive intergenerational transfers during demographic transition.

The hypothesis that demographic factors themselves strongly affect saving, and predictions of a substantial drop in both private and national saving as a result of population aging have not been supported by empirical studies (OECD 1995). The observed drop in national saving correlated with aging appears to be associated primarily with the deterioration in government saving.

_4_ The U.S. experience suggests that development of private pension plans in addition to a PAYG system may have a positive impact on private saving. For a discussion see World Bank (1994) and IMF (1 996a, b).

5 The multi-pillar approach was developed by the World Bank (1994) to separate the redistributive and saving aspects of a pension system. The three pillars in this approach are: an obligatory universal public pension scheme guaranteeing a basic flat pension, an obligatory enrollment in a private pension saving plan, and additional private saving on a voluntary basis. Private saving obligation is important primarily for societies that cannot afford to pay from government budget for an adequate universal flat pension. It requires, however, that several conditions be met (such as development of the financial infrastructure and a reasonable ratio of administrative costs) and is not suitable for every country. For comparison of the administrative costs of the different pension schemes, see ValdesPrieto (1994).

6