Economics Notes > University Of Birmingham Economics Notes > Contemporary Issues in the UK Economy Notes
Population Ageing And Pensions Notes
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Population Ageing And Pensions Revision
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Population Ageing and Pensions Introduction Most developed countries, like the UK have experienced a continued rise in LE over the last 150 years. Puts pressure on the welfare state. People are living for longer but also working for fewer years, together with a lower proportion of people of working age to suggest the UK faces a pension's crisis. Average age at death has risen steadily over time, so more people reach pensionable age. And those who reach pensionable age on average live for longer. Birth rates have also fallen or remained steady, so the proportion of people of working age in the economy has fallen. Implying a continuing increase in the Old-age dependency ratio (the number of people aged 65 or over per person aged 15-64). MEIER AND WERDING (2010) Ageing and the welfare state: Securing sustainability "Over the next four decades, increasing old-age dependency ratios exert an enormous upward pressure on welfare spending in most developed countries. As this is mainly due to existing unfunded public pension schemes, many countries have embarked on far-reaching reforms in this area, strengthening actuarial fairness, modifying indexation rules, adding elements of prefunding and, last but not least, attempting to extend the period of economic activity. Efforts to contain costs may also be relevant with regard to public expenditure on health and long-term care but, thus far, no country has started to really deal with these issues. Still, some countries have made substantial progress in securing the long-term sustainability of their welfare systems. What remains to be considered is re-constructing the system of intergenerational transactions as a potential way of removing disincentives to raise children and invest in their human capital in the long run. Clearly, countries with more generous public pension schemes and heavier public intervention with regard to health and longterm care are facing greater difficulties in keeping these systems sustainable as the process of ageing unfolds." BARR (2006) Overview of the issues SHOULD BE PENSIONS BE PAY-AS-YOU-GO (PAYG) OR FUNDED? In a PAYG scheme pensions are paid out of current income. In a fully-funded scheme, pensions are paid from a fund built over a period of years from members' contributions. Virtually all state pension schemes are mainly PAYG; private schemes are generally funded (though not necessarily adequately). Chile has become a famous exemplar in the debate. In 1981, Chile moved from PayAs-You-Go (PAYG) pensions to individual funded accounts. This strategy, in essence a form of privatisation, many countries, notably in Latin America and Central and Eastern Europe have added mandatory contributions to private, funded pensions alongside contributions to the PAYG state system. Advocated by the World Bank. Pensions have multiple objectives, including insurance (e.g. in respect of the longevity risk), consumption smoothing (i.e. enabling people to redistribute to themselves over their life cycle), poverty relief, and redistribution. Some writers argue that an additional objective is to promote economic growth. A
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