Session: 83

Pensions

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Summary

The present paper deals with some basic characteristics of both pension finance systems pay-as-you-go and capital reserve. The merits and demerits of both finance systems are discussed at length. The major question mostly asked is whether funding does matter and if so, which conditions have to be fulfilled. 

Funding generally does not transfer the pension burden over time,opposed to frequent usual thinking. Apart from stimulating national savings and investments the major advantage of funding is that it provides the best way of securing pension liabilities and an adequate mechanism for solving the distributional problem of national product between the retired and non-retired by the ownership of (part of) the capital stock. After many years ofdebate of pay-as-you-go versus funding it can be concluded that the debate has lost much of its heat. The issues are better understood and there is convergence on some basic points.

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Retirement

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Summary

Population aging was unknown before the middle of the 20th century. Nowadays developed countries are in unprecedented transition to a new era with aging populations. Aging will result in a smaller proportion of the population being employed in the decades after 2010/2020. Another primary issue which may harm industrialized economies is whether aging and particularly pay-as-you-go based pension systems will depress saving and investment. Changing demography, fewer workers and more retirees, gives rise to much concern on the fiscal sustainability of public pension schemes, health care systems and other social services . As a result pension reform is in discussion in all developed countries. 

The main features of the debate of the relationships between population aging, labour supply and saving behaviour are summarized. Technological development, economic globalization and institutional changes are long-term processes occurring over the same time period as population aging. Under the plausible assumption that 2 percent yearly growth in per worker production can be realized in the coming two decades and 1 percent in the years after 2020, it can be demonstrated that per capita consumption of the working population increases from 1995 to 2020 by 80,6 percent and that of the 65+-population by 125 percent. Only with a zero growth rate of labour productivity average welfare will decrease by about 8 percent, whereas a minor 0.4 percent productivity growth with unchanged labour participation rate suffices to maintain welfare at its present level.

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