New pensions

The “pay-as-you-go” government pension system common to many countries, as you point out, will not be financially sustainable, the result of the rapid ageing of societies in developed countries (No 262, July 2007). As your graph shows, the only way to fund the pensions deficit will be through one or all of the following measures: a large tax increase, a substantial decrease in benefits or a significant raise in the retirement age.

Before trying to reform rich world government pension systems, however, it is worth considering whether they are actually achieving perhaps their two most commonly stated objectives.

Do government pensions currently provide an income which allows the vast majority of people to maintain their pre-retirement living standards? The answer is probably no. Do government pensions, by providing an initial stimulus, then at least encourage people to further save for their retirements? Judging by the record levels of household debt in several OECD countries, the answer would again appear to be no. Indeed, government pensions more likely discourage private savings because individuals mistakenly expect their pension benefits to be greater than they actually will be.

A switch to voluntary, individually owned, privately invested accounts would provide a far better retirement system for many working people. It would provide higher retirement benefits, offering people a better rate of return on their money, and lift more seniors out of poverty. It would be solvent, as individuals could only take out what they put in, with interest. It would also eliminate many other problems arising from mandatory state pensions–from no longer penalising groups with shorter life expectancies to freeing pensioners from dependence on the whims of politicians for their retirement income.

Public information campaigns alerting people to the pros and cons of exposure to different levels of risk in their retirement portfolios would seem sensible. But rather than attempt to fix unworkable pension systems, it would be far wiser to create new ones that do.

D. Kimble
Long Island, New York, US

©OECD Observer No 263, October 2007

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