Diversifying Financial Assets for Poor People: Micropensions as a tool to build wealth.

[dkf]

28-Jul-2010    This article by Christina Barrineau, former Chief Technical Advisor for the United Nations Capital Development Fund, stresses the need for micro pensions, which can help poor people build wealth.

Poor people need access to a variety of real and financial assets to build wealth. While using both formal and informal mechanisms, they seek the same financial goals as the rich, such as capital appreciation, risk mitigation, capital preservation, and financial leverage (i.e., increasing expected rates of return by assuming more risk). In order to achieve these goals, they must diversify among various financial products. Poor people invest in a variety of real assets: microbusinesses, gold, land, and livestock. While values of these real assets constantly fluctuate, these variations can offset one another when held concurrently, thus producing more constant rates of return for investors. However, helping poor people to build wealth should go beyond investment in real assets and extend to increased access to key financial products. Needs-appropriate credit, savings, insurance, and pension are key drivers of financial health among poor people. Pensions, in particular, aid in growing capital. 
 
A Huge Untapped Market for Micropensions Exists in the Developing World 
As populations worldwide are aging, the number of people over the age of 60 is expected to more than double by 2025 from 1.6 billion to 3.8 billion<1>. There will be more than seven times as many elderly people, per capita, in developing countries versus industrialized countries by 2025; this number is expected to increase beyond 2025. With improved health care, although desirable, longevity increases, thus indicating that, at a rate of 2.1% growth per year, the elderly population in developing countries should increase by about 70% by 2025. 
 
Income gains that the elderly worldwide made between the mid 1970s and early 1990s will be reversed by these new demographic trends and changes in longevity. The elderly in middle and upper income brackets can manage a 20% reduction in income, whereas the weight of this burden is too cumbersome for poor people who experience a diminished ability to purchase food, medicine and other necessities. As poor people attempt to reconcile increased longevity with the resulting diminished income, their ability to provide for their futures is increasingly hindered. In addition, traditional family care systems for old age security continue to decline, as their ability to cope with encumbering medical and other expenses associated with old age becomes increasingly difficult. Access to financial products can provide self-employed poor individuals with lifelong financial security. Pensions, currently unavailable to the majority of poor people, could offer this hope. 

Limitations of Existing Pension Schemes 
Countries providing pension often use a pay-as-you-go defined benefit system, meaning that each age group of workers contributes toward the fund for their predecessors, with the understanding that each following age group will continue to do so. As the population ages, however, contributions grow and surpluses become deficits. With defined benefits, pensioners are guaranteed a specific monthly benefit when they reach retirement. Professional money managers usually make investment decisions for pension funds and the fund, rather than the pensioner, assumes the investment risk. 
 
The future of public pension systems should be in fully funded, defined contribution plans, not pay-as-you-go defined benefit plans. A "fully funded" plan indicates that workers finance their future by paying taxes today. This way, unaffordable promises and the inherent debt associated with them are avoided as assets earn interest. Workers make a "defined contribution" by depositing a certain portion of their income. These pensions can induce large-scale wealth building. 

http://www.pensiondevelopment.org/396/diversifying-financial-assets-for.htm

[MadHound]

1. Nice on paper, but the way microloans have done harm, and then collapsed,

I think this should be implemented cautiously, if at all.

[dkf]

2. Micro loans have the same possible downfalls as any other loan.

The biggest problem is when lending is done indiscriminately making repayment next to impossible. Or course a global crisis doesn't help either.

But all people the world over should be thinking about avenues to building wealth. To do otherwise leaves them to the vagarities and whims of others.

[MadHound]

3. I agree,

But all I'm saying is that this needs to be fully thought through, worked through, so that it indeed works as promised.

People thought that microloans were the next latest, greatest way to save the poor and downtrodden, and rushed in far too quick with too little forethought. When things headed south, they headed south in a big way, and lots of people wound up either back where they were to begin with, or even worse off than before.

I'm not saying that these sorts of solutions are bad, or arent' needed, they are. But they need to be thought through carefully, and account for all possibilities before turning them loose.