Task 6 Are future pensions secured? Bruno Miguel Silva Abrantes Current Issues in Economic Policy Academic year 2012-2013 Contents Are pensions secured? Understanding pensions Pensions aim to handle the transition of a person as worker to retired. So that he enjoy an income provided by the state or another organization and maintain a similar standard of living to what he had while employed and thus have a comfortable life economically, until the end of his life.
The second objective of a pension is related to the fght against poverty which is done through a redistribution of income that romotes equity, within the elderly class. 1 There is a growing concern on the part of the European Commission on the sustainability of pension systems in the various countries of the European Union. The recent financial and economic crisis has revealed weaknesses that several countries have and bring into question the sustainability of the pension system. Economic growth slowed, unemployment has risen and the public accounts are in poor condition.
One of the more serious implications on future pensions is related to the fact that a large part of the population remains unemployed or is forced to accept Jobs where they get lower ncomes, or work less time, which will result in a lower pension. 2 Further compounding the situation is a major demographic trend towards an aging population. The increase in life expectancy over the past decades, combined with low fertility rates is creating a change in the composition of the population. The number of active workers will decrease while the number of people who are retired will increase.
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Moreover, the numbers of years that a person remains employed is dwindling, partly because people start to work later, due to the many years spent in education. On the other hand there is a great tendency in obtaining early retirement ue to existing policies and management ot age in What are the main systems of pension funding? the labor market. In several countries of the EIJ-27 the public sector is largely responsible for pensions, early retirement, disability and survivors. However there are some differences between the various members of the European Union at the level of pensions related to occupational or private pensions.
In a generalized way pensions can be classified into three pillars: The public social security system, mandatory or voluntary occupational schemes and voluntary private schemes. The first, public social security system is undoubtedly largely responsible for the allocation of pensions to the population in most member states of the EIJ-27. This pillar can be characterized mainly by the Pay-as-you-go system (PAYG). In this system pensions are financed directly from taxes and social contributions that workers are paying in the present.
The taxes are used to pay pensions in the short-term instead of being used to create funds that may grow in the long-term and benefit future generations. 3 Schemes within the second pillar can be mandatory or voluntary occupational schemes. Participation in these funds is usually mandated by law and aims to provide an adequate pension to retired people according to what they saved during their working life. These funds are created by a company or organization in order to provide proper pensions to their employees, which should correspond to the effort and contribution the workers exercised.
Both the employee and the employer contribute to the fund, which grows with the return rates that vary with the state of the market and the economy. The amount of the pension depends on the number of years of service and final salary of the employee. These funds are important to relieve the responsibility of the state to secure pensions in the whole population, but also because it is believed that these organizations are able to grow a fund more effectively than the state would. 4 The third and final pillar is characterized by private schemes. These are schemes that help people to accumulate savings for their retirement.
The people who wish to do so can choose from a wide range of schemes who best match their needs. There are funds that are riskier; however the contribution that person does is less than the benefit you will receive if all goes well. On the other hand there are safer funds in which the benefit will match the contribution made. Typically these funds are voluntary and are complementary to government reforms that people receive from the state. 5 Looking at table 7(in appendix) we can divide public pensions, which are part of the first pillar of pensions in various sub-groups.
Among which we can find Minimum pension / social allowance, Old age, early retirement, disability and survivors' pensions. Early- retirement, old-age pensions, disability and survivors' pension exist in almost all 27 member states. Early retirement does not exist in the Netherlands, Malta, United Kingdom and Norway. These schemes operate mostly in the form of earnings-related, which means that pensions are assigned according to what people earned and contributed during their working life. However not all countries have adopted this scheme in the same way.
In Denmark, survival and disability pensions are awarded according toa flat rate, offering a pension with a fixed value over time. This way of organizing pensions can promote greater social equity it the people who are the target of these flat-rate pensions have not worked or contributed enough to receive a ension that is sufficient to have a good quality of life in old age. However the state has to make an extra effort to fund this pension scheme, an effort that ultimately fall on taxpayers, since the people who will receive these pension contributed less than the amount of pension they will receive. Minimum pension or social allowance schemes exist in all EIJ member-state. These pensions are usually means-tested, in the sense that people are tested to understand whether they are , that is according to what the person has earned and contributed as an employee, or if they did not ork and had no and any gain if they have worked and which contributed received is not enough to access a normal pension. This type of pension is normally financed by taxes on citizens rather than individual contributions of individuals to pension funds. In the 2nd pillar we find Mandatory / voluntary schemes occupation.
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