For millions of people working in formal economies, pension plans are something to depend on for the rest of their lives. However, this simple monetary return in exchange for a long working life has gone on to become a big upcoming crisis. Major economies like the USA, UK, China, Germany, etc. are overcoming this crisis more acutely than others thanks to their large formal workforce, but sooner or later paying pensions is going to be an international crisis across the globe. The global pension crisis, especially prevalent in the OECD (Organization for Economic Co-operation and Development) countries, indicates a complex problem associated with economies, government plans, natural population cycle, and societal rules.
GLOBAL PENSION CRISIS
It is important to know how the government pension system works to understand the current crisis. Currently, three kinds of economic backup systems can be classified as pension plans. One is individual savings and another is private funds, namely through banks. However, the major pension system is the one funded by the government. Public funded pensions draw from current workers’ salaries to pay pensions to retirees.
Currently, all the 32 OECD countries, plus China, India, and other major economies of the world owe a large portion of the money to retirees and upcoming retirees. Most of these countries have a strong social security plan which takes care of citizens’ unemployment, medical care, housing, and many other basic facilities through public funds. As the number of retirees is growing fast compared to new entries in the job market, public funds are running short of what is needed to pay to older generations in the future. Various estimates put the number of the shortfall at 70 trillion USD by 2020. At this rate, by 2050 pensioners will be owed a whopping 400 trillion USD by the governments. The sum is five times larger than the projected world economy at that time (80 trillion USD). Major economies are trying hard to solve the puzzle without disturbing the living standard or average life expectancy. Economies just cannot sustain paying more and more to a bulging retired population.
REASONS
As of 2015, at least 75% of shortfalls in a global pension are due to a lack of public funds. The rest of the shortfalls belong to personal savings and private pension systems. While the public fund shortfalls are already prevailing, private funds are also short of cash. Ongoing pandemics and economic recession have impacted every sector of private-public economic life.
THE CYCLE OF POPULATION GROWTH AND DECLINE
A 2017 study by The Lancet shows global fertility rate and the number of live births per woman halved from 4.7 to 2.4 as it is continuing to decline. Stats show the population of a certain country starts to fall if the birth rate is below 2.1. As for evidence, most of the developed countries are experiencing a shrinking population and even mammoth populations like China will also shrink in the future. The Lancet report predicts the global population to peak by 9.7 billion in the 2060s and then drop to 8.8 billion by 2100. The pension crisis rose as a sign of this versatile problem.
On a local scale, developed or major economies strongly depend on immigrants to cover the lessening workforce but, the global trend of population decline is uninterrupted as of 2021. Developing nations have been experiencing a declining growth rate as governments there have strong policies to reduce population size.
As the number of retirees is growing fast compared to new entries in the job market, public funds are running short of what is needed to pay to older generations in the future.
INCREASING LIFE EXPECTANCY
The pension crisis is not related directly to the reduction of population. But as of 2021, developed economies, and the developing world in total, have had tremendous success in maintaining a higher average life expectancy than previous decades.
Take Japan for example. The retirement age is 60 in Japan. This was fine in the 1960s and 1980s when the country was facing population growth. But with time, Japan’s highly modern living standard has ensured people live longer and a reduced fertility rate. Thus, Japanese life expectancy has shot up from 67 in the 1960s to almost 84 in 2015. So naturally, the government has to pay pensions for longer and longer terms for each retiree. While the population is also aging at the same time, numbers of new workers are declining. As stated earlier, government pension plans are simply finding it difficult to pay for such a long duration. The problem is also acute in other major Western nations like Germany, the USA, and the UK. With the growth of average life expectancy, the median age is increasing, creating a cycle where former workers are to be paid for longer durations for 2 decades or more.
Housing, medical care, school, and other expenses, flexibility for working mothers, etc all are somewhat contributing to reduced growth rates across the globe.
SOCIO- ECONOMIC ISSUES
The rise in obesity, environmental factors, poverty, urbanization, and all of its complexities, has reduced the overall interest of younger generations to form a family or give birth. Housing, medical care, school, and other expenses, flexibility for working mothers, etc. all are somewhat contributing to reduced growth rates across the globe. Delaying to start a family due to a career or other reasons is also lessening the chance of conception.
PROPOSED SOLUTIONS
Welfare systems in OECD and many developing countries set aside large amounts of cash for public subsidies. In developed countries, issues of medical or education subsidies are the cornerstone in politics. Now the looming pension crisis has raised difficult questions like how to afford to pay retirees.
For decades, China has maintained a strict one child per family policy. However, the situation is reversed now as the Chinese government is encouraging young couples to have more kids. Many well-developed economies offer various forms of support, money, and other facilities to encourage population growth too. Most of the developed world has a median age of more than 40. Encouraging the growth of the younger population is viewed and enforced as a suitable solution for many of them. Another solution is immigration. But the issue of immigration itself has major socio-political consequences and is a topic of hot debate.
In OECD states, less than half of people aged between 55 and 64 are employed. Many choose early retirement or other forms of exemption given that most of those countries have strong social security systems. Countries are also trying to stop the chances of early retirement to fight the bulging payment. Proposed solutions include an overall remodeling of retirement plans, encouraging people to have longer careers, the use of automation to help older people in the workplace, etc.
In the case of major developing and newly industrialized countries (India, Brazil, South Africa, Philippines, Indonesia, etc), a large part of the economy is in informal sectors, the population is largely younger, and social benefit plans are not well encompassing so governments are not yet burdened to pay. But with fast-paced developments, pension crises are to soon loom over these economies too.
