The Global Pension Challenges indicate that paying pensions to retirees is causing big financial issues for all economies with a pension system. The idea is that people who have worked hard should have enough to live on when they’re older. That makes sense, right?
But when you look at the numbers and the economics, it seems almost impossible to make this work. It’s like the practical side of things doesn’t match the real need people have.
Think of pension schemes like this. They’re funded by people who are currently working and contribute a certain percentage of their earnings to a savings fund. This fund is then invested, and the money grows through interest. When it’s time for someone to retire and claim their pension, they receive a portion of this interest.
It’s important to note. That the people putting money into the fund (contributors) are not the same people taking money out (claimants). The person contributing today could be the one receiving payments in the future, depending on whether they meet the criteria. This cycle keeps repeating as more people join the workforce and retire over time.
In today’s environment, two main global pension challenges are complicating this process.
- After World War 2, people started living a lot longer. They’ve added about ten years or more to their average lifespan. This change means that the number of people asking for money from their retirement savings. Isn’t decreasing as quickly as it used to. Because people are living longer. The amount of money they’re getting from their savings is more than what the savings are earning.
- In some places, the total number of people is going down. So at the beginning of one decade. You might have 100 people asking for money and 90 people putting money in. But at the start of the next decade. You could have 105 people asking for money and only 88 people putting money in. This trend might continue. With the number of people paying in being less than the number of people asking for money. Especially in countries that have a well-working pension system.
Issues of inflation
On top of these, there’s also the issue of inflation. Roughly every 8-10 years, the value of money gets cut in half. So, if your pension stays the same, in a decade it will only cover half of what it does now. This becomes even trickier when you think about how as people get older. Their health and medical expenses tend to increase. This raises the question of how much the government is expected to provide for its citizens.
The problems of people living longer, prices going up and fewer people working. There’s also the issue that some people want higher pension payments to keep up with rising prices. But when pensions are increased without enough money coming in. The total savings will decrease over time making it hard to pay for everyone’s pensions in the future.
If the people currently receiving pensions take money that should be saved for future pensions, we will have to address the lack of enough savings.
If we have to find money to pay for the long-term needs. There are only two possible outcomes.
- Either taxes go up a lot, or we borrow more money to cover the gap.
- If we can’t do what I mentioned earlier. We might have to choose between stopping investments in things like roads and buildings. For at least ten years to put that money towards pensions. But neither option is good.
Spending more money on pensions means we have less money to build things like roads and buildings for the future. This pension issue is a big problem for many countries.
Inflation is the scariest economic problem we have. People living longer means we have more elderly people (who typically aren’t working). We can’t make more young people, we can only make the old ones live longer.
People think India has an advantage because it has a lot of young people. But if the number of young people keeps decreasing over the next 20 years, India will have more older people. This is a problem because older people tend to be less productive. If people aren’t productive, the country won’t make as much money per person as other countries.
This issue will become more serious as the number of people working and the money they make decreases. While the number of retirees who need money increases. That’s why many countries are struggling to pay for pensions. The difference between what they have and what they need for pensions is growing. How to get the money to fix this problem is the big question.