The pensions crisis, or pensions time bomb is the predicted difficulty in paying for corporate or government pension benefits in various countries, due to a mismatch between pension obligations and the resources set aside to fund them. The basic difficulty of the pension problem is that institutions must be sustained over far longer than the political planning horizon., pp. 224, "年金問題における基本的な困難は、ほとんどの政治家たちが考慮に入れる当面の短い期間よりもはるかに長期間にわたって制度が維持されなければならないことにある.政治家たちは選挙民の歓心を買おうとして年金給付の充実のみに熱中し、そのツケを将来の世代(現在まだ生まれていない人々も含む)に回すという選択をしがちである.そのような政治家たちの選択によって、年金制度はその長期的安定の基礎を掘り崩されてしまう."(reverse translation from the Japanese edition: "The basic difficulty of pension problem is that institution must be sustained over far long times longer than the times almost politician assume. Politician tend to choice that only devoting themselves to full up pension payment for curry favor with voter, and make return its result to next generation (that contain a people have not born yet now). By such politician's choice, the base of long-time stability of pension institution is dug down thoroughly.") Shifting demographics are causing a lower ratio of workers per retiree; contributing factors include retirees living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers, especially relative to the Post-WW2 Baby Boom). There is significant debate regarding the magnitude and importance of the problem, as well as the solutions. One aspect and challenge of the "Pension timebomb" is that several countries' governments have a constitutional obligation to provide public services to their citizens, but funding for these programs has been strained due to increasing dependency ratio, which increases costs of elderly care. In pay-as-you-go pension systems decreasing total fertility rate causes lifetime pension benefits to be smaller than lifetime contributions.
For example, , the estimated underfunding of the United States Social Security program is $29.3 trillion or 1.5% of GDP over the years 2026-2100. This has been increased from $25.1 trillion in the previous year's report of the Social Security Administration. This amount would have to be set aside today so that the principal and interest would cover the program's shortfall between tax revenues and payouts over the next 75 years.
Background The ratio of workers to pensioners, the "support ratio", is declining in most countries. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate. Currentlty, over 50% countries are below the replacement rate of 2.1 child per woman. Increased life expectancy (with fixed retirement age) increases the number of retirees at any time, as individuals are retired for a longer fraction of their lives, while decreases in the fertility rate decrease the number of taxpayers to fund pension obligations.
In 1950 there were 7.2 people aged 20–64 for every person of 65 or over in the OECD countries. By 1980, the support ratio dropped to 5.1 and by 2010 it was 4.1. It is projected to reach just 2.1 by 2050. The average ratio for the EU was 3.5 in 2010 and is projected to reach 1.8 by 2050. Examples of support ratios for selected countries and regions in 1970, 2010, and projected for 2050 using the medium variant:
Country or Region 1970 2010 2050United States5.24.62.5Japan8.72.61.3United Kingdom4.33.62.1Germany4.13.01.7France4.23.51.9World8.97.43.5Africa13.613.28.8Asia12.08.63.3Europe5.43.81.9Latin America & Caribbean10.88.33.0Northern America5.34.62.4Oceania7.25.33.0
Key terms Support ratio: The number of people of working age compared with the number of people beyond retirement age Participation rate: The proportion of the population that is in the labor force Defined benefit: A pension linked to the employee's salary, where the risk falls on the employer to pay a contractual amount Defined contribution: A pension dependent on the amount contributed and related investment performance, where the risk falls mainly on the employee
Pension computations Pension computations are often performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. One area of contention relates to the assumed annual rate of investment return. If a higher investment return is assumed, relatively lower contributions are demanded of those paying into the system. Critics have argued that investment return assumptions are artificially inflated, to reduce the required contribution amounts by individuals and governments paying into the pension system. For example, bond yields, the return on guaranteed investments, in the US and elsewhere are low. The U.S.and other stock markets did not consistently beat inflation between 2000 and 2010.
But multiple pensions have annual investment return assumptions in the 7–8% p.a. range, which are closer to the pre-2000 average return. If these rates were lowered by 1–2 percentage points, the required pension contributions taken from salaries or via taxation would increase dramatically. By one estimate, each 1% reduction means 10% more in contributions. For example, if a pension program reduced its investment return rate assumption from 8% pa to 7% pa, a person contributing $100 per month to their pension would be required to contribute $110. Attempting to sustain better-than-market returns can also cause portfolio managers to take on more risk.
The International Monetary Fund reported in April 2012 that developed countries may be underestimating the impact of longevity on their public and private pension calculations. The IMF estimated that if individuals live three years longer than expected, the incremental costs could approach 50% of 2010 GDP in advanced economies and 25% in emerging economies. In the United States, this would represent a 9% increase in pension obligations. The IMF recommendations included raising the retirement age commensurate with life expectancy.
Proposed reforms Reform ideas can be divided into several primary categories: The worker-retiree ratio and old-age dependency ratio can be addressed by raising the retirement age, part-time work by the aged, and changing employment and fertility policy. The pension obligations can be reduced by reducing future payment amounts (by, for example, adjusting the formula that determines the level of benefits or by shifting from defined benefit to defined contribution pension types) Resources to fund pensions can be increased by increasing contribution rates (for example by the encouragement or reform of private saving to grow the savings rate using methodologies such as mandatory and auto enrollment) or raising taxes. In the United States, since 1979 there has been a significant shift away from defined benefit plans with a corresponding increase in defined contribution plans, like the 401(k). In 1979, 62% of private sector employees with pension plans of some type were covered by defined benefit plans, with about 17% covered by defined contribution plans. By 2009, these had reversed to approximately 7% and 68%, respectively. , governments were beginning to follow the private sector in this regard. Recently there have been some proposals for confiscation of private pension plans and merging them into government run plans.* Karen McMahan, Making 401(k)s And IRAs More Like Personal Pension Plans , Carolina Journal Online, November 6, 2008; article states that Dr. Ghilarducci, professor of economic policy analysis at the New School for Social Research proposed "that the government eliminate tax breaks for 401(k) and similar retirement accounts, such as IRAs, and confiscate workers' retirement plan accounts and convert them to universal Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration." Jan Iwanik, European nations begin seizing private pensions , Christian Science Monitor, January 2, 2011. Pension systems can be reformed to be intrinsically balanced. In his book titled The Pension Fund Revolution (1996), Peter Drucker point out the theoretical difficulty of a solution, and proposed a second best policy that may be enable to enforce., pp. 238 "...次の三つの条件を満たすことが必要である: (1)主要資源とくに資本と知識労働者の生産性を着実かつ持続して向上させていくこと(2)資本形成を着実かつ持続して増大させていくこと(3)公共支出や国民所得のうち、移転支出や福祉支出に向ける部分の増加を食い止めること"(reverse translation from the Japanese edition: "...These three conditions must be satisfied:(1)To increase exactly and continuously productivity of major resources especially capital and white color labor work(2)To increase steadily and continuously capital growing(3)To prevent increasing for transfer expenditure and welfare expenditure, out of public expenditure and national income")
Auto-Enrollment
Research proves that employees save more if they are mandatorily or automatically enrolled in savings plans. Laws compelling mandatory contributions are often politically difficult to implement. Auto-Enrolment schemes are easier to implement because employees are enrolled but have the option to drop out, as opposed to being required to take action to opt into the plan or being legally compelled to participate. Most countries that launched mandatory or auto-enrolment schemes did so with the intention of employees saving into defined contribution ("DC") plans.
Whilst mandatory & auto-enrolment schemes have been incredibly successful overall, a major problem was created by the fact that they were launched as DC plans with no real consideration given to what happens when plan members reach retirement and need to begin decumulating their savings.
As an example, Singapore & Malaysia both launched mandatory enrolment schemes Central Provident Fund or CPF in 1955 and the Employees Provident Fund (Malaysia) or EPF in 1951.
After the first generation of employees retired, they typically withdrew their pension balances and spent it. The Singapore Government responded by launching CPF Life which mandatorily annuitised a large portion of the CPF savings with the theory being that 'the government tells you and me, "The reason why I must take $161,000 away from you is because if I don't, if I give you the full $200,000 to take out at age 55, some of you, you will take the money and you will go Batam. Some of you will go Tanjung Pinang. Some of you suddenly got a lot of relatives popped up then you don't know how to say no because you're so nice. Then after a while, we have no money left."'.
As a result, Singaporean employees now automatically receive a pension income for life in retirement from CPF life. The EPF on the other hand has never been able to successfully introduce a decumulation solution. Reports produced by the EPF show that 90% of EPF savers have spent all of their savings within 18 months of reaching retirement age.
Following the UK's successful by introducing Automatic enrolment in 2012 based upon behavioural economic theory the Department for Work & Pensions has now proposed new legislation which enables the creation of risk-sharing decumulation solutions such as collective defined contribution schemes and Tontine pension schemes the latter of which also benefits from behavioural economic effects according to Adam Smith in his book The Wealth of Nations.
By country United States
The Pension Benefit Guaranty Corporation's (PBGC) financial future is uncertain because of long-term challenges related to its funding and governance structure. PBGC's liabilities exceeded its assets by about $51 billion as of the end of fiscal year 2018—an increase of about $16