Problems of Present Pension System

We Should Abandon Present, Inefficient Pension System. Why?

Date: 22th August 2022

Nearly every country has various pension schemes for old age/after retirement life. There are various forms of pension schemes: for employees, for organized sectors, for unorganized sectors, for every citizen having mandatory & non-mandatory contribution and voluntary & compulsory participation.

These pension schemes are part of the government’s social welfare schemes. In some countries, Pension expenditure and social expenditure form considerable part of government’s total expenditure and % of GDP.

 Table. 13.1. Showing Pension Spending as % of GDP in   major OECD countries   Table. 13.2. Showing Social Spending as % of GDP in major  OECD countries 
 Country   Year   % of GDP   Country   Year   % of GDP 
 Italy   2017   15.64   France   2018   31.077 
 Greece   2017   15.488   Finland   2018   29.275 
 France   2018   13.596   Italy   2018   27.768 
 Spain   2017   10.903   Austria   2018   26.914 
 Poland   2017   10.571   Sweden   2018   25.79 
 Germany   2017   10.202   Germany   2018   25.34 
 Japan   2017   9.358   Greece   2018   24.13 
 OECD- Total   2017   7.692   Japan   2017   22.32 
 Turkey   2017   7.36   UK   2018   20.291 
 USA   2017   7.077   OECD – Total   2018   19.809 
 UK   2017   5.629   New Zealand   2018   19.389 
 New Zealand   2018   4.968   Hungary   2018   18.81 
 Canada   2017   4.807   USA   2018   18.19 
 Australia   2017   3.993   Canada   2018   17.985 


Above tables 13.1 & 13.2 shows how pension and social spending form a significant part % of the GDP of major OECD countries.

In developing countries, for example in China pension spending is around 5% of GDP and in India; it’s around 2-3%. In developing countries, pension spending is quite low compared to developed countries.

The Pension system is important, as it provides security after retirement/ in old age when our body doesn’t allow us to work biologically. But present pension system has many problems/issues: are mentioned below:

1. Present Pension Model is either a contributory one (voluntary or non-voluntary) where individuals/employers contribute for their/employees retirement life or the one where governments support older people through various schemes. First way is not a universal one and the second way puts a fiscal burden on the government. The Biggest problem of this system is that it is not universal in nature.

2. In the present pension system: there are three participants (can be one or two or all three: vary from country to country and pension schemes).

3. Three participants: Consumer (employee), Entrepreneur (employer) and Government. Contribution from participants depends upon pension schemes. In some schemes, all three participants, in some first two, in some first and third and in some schemes only the third one that is government, take the whole burden.

4. When an employee (a consumer) contributes (nearly 10% of salary in some pension schemes): it reduces the present spending of that consumer. So reduces the aggregate demand.

5. When an employer (an entrepreneur) contributes: it reduces his profit margins. So decreases the capital investment.

6. When the government contributes: it increases the burden (fiscal pressure) on the government. For the contribution, governments have to increase the revenue (taxes/borrowing/fiscal deficit etc.). It increases the welfare schemes of the government. So increases government intervention in free markets.

7. Contributed money goes in the pension funds. These pension funds invest the contributed money acc. To the pension schemes: in fixed deposits, in bonds, in debt market, in capital market, Stocks, venture funds etc. These funds appoint a team of experts for the management of funds. In some countries, these pension funds have huge money under their management that they have become the dominant investment player in the markets.

8. Though Investment from pension funds helps the economic unit, it lacks self-interest, True spirit of investment/ to seek profits which the entrepreneurs represent.



So in the present financial model, present pension system

Reduces the private consumption: that means reduces the aggregate demand.

Reduces the profit margins of entrepreneurs: that means reduces the capital investment.

Increases the burden on government: means fiscal pressure. Governments have to increase the revenue (taxes/borrowing/fiscal deficit etc.)

Whatever demand created/investment done by pension funds does not represent the true of spirit and lacks the self interest.



Looking at the above points, present pension system is not good for any participant (consumer, entrepreneur and government). So we must abandon this pension system and find a more productive one which should solve the above problems and represent forces of free market economy.

New financial model proposes to abandon this inefficient pension system and introduce a more productive "New and Universal Pension System" which will represent the forces of a free market economy. Read it from the below link


Contacts

Resham Singh

Research Analyst (Certified)

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