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Will Aging Populations Destroy Public Pension Systems?

Will Aging Populations Destroy Public Pension Systems?. Harrison Brown Jorge Vilarrasa. Population Aging. The World Population is Aging – particularly in developed countries Elderly populations will likely comprise 30% of the developed world by 2050 (formerly 2-3%).

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Will Aging Populations Destroy Public Pension Systems?

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  1. Will Aging Populations Destroy Public Pension Systems? Harrison Brown Jorge Vilarrasa

  2. Population Aging The World Population is Aging – particularly in developed countries Elderly populations will likely comprise 30% of the developed world by 2050 (formerly 2-3%). • World fertility rate has dropped from 5.0 to 2.8 since the 1960s. The developed country fertility rate has dropped to 1.6.

  3. Current Public Pension System Currently a pay-as-you-go system Public spending on pension entitlements could reach 25% of GDP for the average developed country Pension systems are unsustainable without reform

  4. Reform Strategies - Demographics • Increase fertility • Avoided because of policy message contradictory to low-fertility foreign aid encouragement • Best strategy is to reduce family burden of children • Increase migration • Stabilizes the worker/elderly ratio • Often very politically controversial

  5. Reform Strategies – Economics • Increase productivity • Generates more revenue for the pension systems • Reduce labor restrictions and increase work incentives • Increase female participation in the labor force • May prolong an inevitable problem if the elderly population continues to consume a large proportion of resources

  6. Reform – Retirement Incentives • Increase the retirement age • Reduces the worker to pensioner ratio • Currently implemented, but very unpopular as seen in France (raised from 60 to 62). • If Social Security had been “indexed” to longevity, the retirement age should be 72. • Change retirement incentives to reward remaining in the workforce past retirement age.

  7. Reform Strategies - Fiscal • Raise taxes • Supports the systems with increased revenues • Very controversial and impossible in some countries such as France and Italy with high taxes • Short term solution but needs additional reform • Public Spending and Pension Generosity Cuts • Reduces the financial burden • Politically unpopular, especially with large elderly voting community

  8. System Changes • Introduce a funded system • Requires individuals to save more during their working years to pay for retirement • Reduces government debt burden • Yields higher national savings and greater returns on contributions • Multiple options for system design • Possible downside: transition costs • “Double burden” added during transition as working individuals contribute to both systems

  9. Conclusions Yes, the aging populations have rendered pay-as-you-go public pension systems unsustainable. A combination of reforms (demographic, economic, pension policy) are available to reduce this financial risk. One targeted solution is unlikely to provide enough support, so a more comprehensive pension system strategy is recommended.

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