Inclusive Pensions for an Aging World: Evidence and Strategies for Engaging Informal Workers

Executive Summary

In the face of escalating global challenges, including climate change, geopolitical conflicts, and technological risks, low- and middle-income countries (LMICs) are on the brink of becoming old before they become rich. By 2050, one in five people worldwide will be 60 years of age or older, with nearly four out of five of these seniors living in LMICs (Mathews 2024). This demographic shift toward an aging population is accelerating, compounded by increased longevity and lower fertility rates. Further, traditional risk-sharing networks are weakening, with traditional family and community-based support systems becoming less reliable in providing for the elderly. These factors make financing a dignified life for the elderly a major global concern, with significant long-term implications for the economic growth and fiscal sustainability of LMICs.

The demographic shift is compounded by high rates of informal employment that effectively exclude whole segments of the population from traditional contributory pension schemes. Globally, only 35 percent of the working-age population (age 15 and above) actively contributes to a pension scheme, with this percentage dropping to 17.5 percent in lower-middle-income countries and just 5 percent in low-income countries (ILO 2024). Women are particularly vulnerable to old age poverty as they are more likely to work informally, earn lower wages, and experience interrupted career patterns due to caregiving responsibilities (Floro and Meurs 2009; Cameron 2019; Abels, Arribas-Banos, and Demarco 2023).

This leaves funding the growing elderly population, especially those engaged in the informal sector, as a pressing challenge that needs to be addressed—and there is not a moment to lose. To generate meaningful pensions, people must contribute and invest from a young age. Inaction today will either lead to increased poverty and social problems tomorrow or significant fiscal problems down the road.

This Working Paper confronts the challenge head on, focusing on contributory pension schemes for the “missing middle”—those informal workers who have sufficient income stability to save for old age but lack access to appropriate pension mechanisms. Contributory pension schemes for informal workers represent an opportunity to expand retirement coverage without solely relying on noncontributory schemes (e.g., social pensions), which can strain government budgets. They can also mitigate the rising burden on shrinking cohorts of family supporters.

Of course, macroeconomic and institutional stability, supported by adequate physical and digital infrastructure, is a prerequisite for any pension system. Countries experiencing hyperinflation or political instability or those lacking basic digital payment systems cannot realistically ask workers to trust governments with their long-term savings. Building this foundation is essential. Coverage expansion must also go hand-in-hand with parametric reform to build fiscally sound pension architecture; simply adding participants to unsustainable schemes will only increase the implicit pension debt.

This paper investigates diverse approaches to informal sector pensions across different countries and contexts, revealing various strategies governments have used to address the unique challenges of covering informal workers. Some schemes offer flexible defined contribution (DC) models that allow irregular contributions and partial withdrawals to accommodate workers’ volatile income streams. Some approaches demonstrate how pension rules can be adapted based on poverty categories, with some governments providing higher matching contributions to the poorest participants and others providing defined benefit (DB) schemes with guaranteed pension amounts. Sector-specific approaches that leverage existing industry networks and systems have also been tested.

These examples highlight tradeoffs that accompany such design choices. For instance, informal workers highly value flexibility in both contributions and withdrawals to better suit the smaller, more irregular cash flows typical of low-income earners, yet this flexibility fundamentally limits the ability of governments to offer stronger guarantees on retirement payouts without exposing public finances to significant risks. Similarly, while DC schemes offer safe savings vehicles without imposing heavy costs on the state and may be attractive to certain types of informal workers, DB schemes provide the simple, guaranteed payouts that are particularly attractive to lower-income groups and women with limited financial literacy.

Despite the use of different design features that in theory are well suited to address informal worker needs, many existing schemes have struggled to achieve large-scale, sustained participation. Addressing key issues around scale is crucial for developing scalable and sustainable pension schemes that can effectively support informal sector workers. When only small numbers of workers participate, administrative costs per participant become prohibitively high, making schemes financially unsustainable and less attractive to potential participants. This creates a vicious cycle where low participation leads to high costs, further discouraging participation. How best to increase participation and scale, though, remains an unanswered question.

In examining the literature, four takeaways emerge:

1. Prioritize easier-to-reach groups first. Targeting relatively wealthier, organized, or quasi-formal segments can help establish scale, while protecting more vulnerable groups from short-term risks may gradually draw them into the system.
2. Leverage informal sector networks, old and new. Cooperatives, business associations, gig platforms, and even social media influencers can reduce recruitment costs and foster trust, often more effectively than top-down campaigns.
3. Optimize economic incentives. Workers respond to economic incentives, but these must be cost-effective. Interactions with existing formal sector pensions and social pensions must be considered to minimize distortions. Promising but undertested approaches to incentivize participation include bundling pensions with credit or short-term insurance to alleviate liquidity constraints.
4. Comprehensively address behavioral and informational barriers. Piecemeal interventions often appear ineffective because multiple obstacles (e.g., informational, psychological, administrative) operate simultaneously. Integrated approaches combining incentives, administrative support, and personalized nudges are more likely to succeed and should be rigorously tested.

Success ultimately depends on a new wave of applied research and rigorous experimentation to identify what drives informal worker participation in contributory pension schemes. Current evidence, while instructive, remains insufficient. By addressing current limitations and exploring innovative strategies that account for country-specific context, the authors believe it is possible to develop effective pension schemes that can help mitigate the impact of population aging on informal workers.