Think Out Loud

"We do not learn from experience, we learn from reflecting on experience." -John Dewey

Some problems with pension

For most people, there are at least two significant phases in life in which you are economically dependent on others: during your childhood and during old age.  Most national societies have come together and decided to pool their resources to help provide for these life stages.  The results are services as varied as health care, public schooling, social security programs, and more.  Of course, what these problems look like depends in part on the values and fiscal limitations of different countries.

In China and some other countries in Asia, there is less demand for robust social security benefits (the income you continue to receive from the government after you retire).  This is because the the culture has evolved to rely on “family insurance,” or the idea that your loved ones are obligated to care for you in old age.  World Bank predicts that as more countries in South Asia develop their economies, and particularly their middle class, demand for pension programs will increase.

A popular system to provide retired citizens with pension benefits is called “pay as you go”.  Simply put, the current young people in the society pay for the current retirees via payroll taxes.  Another system is sometimes referred to as an “advanced funded” or “privatized” system.  In this scheme, before you retire you must regularly pay some of your salary toward the financial market; unlike normal stock investments, you can only withdraw your benefits when you retire, or after an appointed amount of time (like 30 years).

Many of the people currently approaching retirement know all too well that these advanced funded programs can sour during bad economic times.  During the 2008 financial crisis, many people saw their 401(k) funds decrease by 25 percent or more.  The volatility of financial markets draws attention to the continued need for publicly-funded social security.

So what’s the problem?  For one, nations like the UK and Japan have aging populations; national birth rates are decreasing and life expectancy is increasing.  This means that more money must be diverted to a larger retiree population than existed in former generations, and this money must come from a smaller population of working young people.  Something has to give, the money has to come from somewhere, and it will probably be surrendered from other public sectors like education.

Interestingly, during a recent lecture at National Chengchi University, Cagri S. Kamru, an economist and researcher with the Australian Research Council’s (ARC) Excellence in Population Ageing Research center (CEPAR) said that the United States doesn’t have to worry about pension funding problems caused by an aging population.  Immigration compensates for much of the lagging birth rate.

But the U.S. is not exempt from worries about social security.  Fareed Zakaria warns that the U.S. pension system is like a ticking time bomb, and unions for public servants are mostly to blame.  These unions will regularly make demands for pay increases that governments cannot afford.  To satiate them, politicians get them to settle for increases in their pension benefits.  These benefits won’t start to kick in until the politicians are well out of office.  According to Zakaria, what will happen is that these retirement benefits will starve other recipients of government funding while keeping retired public servants at a higher-than-average standard of living.

Zakaria accuses the Democratic Party of sacrificing their progressive ideals (of fairness and taking care of those most in need) in order to satisfy powerful union special interests.

These are only a few of the problems facing pension programs in the U.S. and worldwide. Do you know more, or do you disagree with any of the analysis above?


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This entry was posted on December 18, 2012 by in Uncategorized and tagged , , , , , , , , .
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