What the Pension System Has Failed to Recognize
Whether you’re starting your first day in your first job, or are fast approaching pension age, it’s incredibly important that you understand pensions, what they are supposed to do, and what they actually do.
Put simply, a pension is a retirement plan that both you and your employer will make contributions to in order for you to have a source of money to draw from when you reach retirement age or become too old to work. The pool of funds that you and your employer contribute to will be invested on your behalf throughout the course of your working life. The earnings made on these investments will then supply you with your income when you retire and are no longer working.
Many people feel that the entire pension system should serve as some sort of social equalizer. You earn your living for old age while you are still able to work. This can prevent the elderly from experiencing difficulty, poverty, or the burden of working while experiencing old age. However, when you actually take a closer look at demographic data surrounding pensions and retirement, pensions can actually seem unjust or unfair. This is largely due to the fact that, in many cases, life expectancy is closely tied to an individual’s socioeconomic status.
Within the same country, those who are more privileged and have a better income are much more likely to live longer lives than those who live in poverty or who have a lower income. This means that in regard to pension plans, the privileged benefit more from pension plans, as they are able to claim payments for a longer time. Payments made by poorer individuals can end up benefiting the already privileged due in a form of financial redistribution from poorer to richer individuals. Now may well be the time for pension reform. Here’s some more information on the topic.
Wealth, Education, and Life Expectancy
It is undeniable that wealth has a significant impact on life expectancy. Those with higher socioeconomic status tend to have longer lives. This is true in situations comparing poorer countries to richer countries, as well as when comparing different classes within an individual country.
In recent years, in particular, a number of studies and statistics have found that the difference in life expectancy between poorer and wealthier individuals within one country has significantly grown in recent years
On top of this, education can play a factor too. Further analysis into the area may well be necessary to draw conclusive claims from these kinds of observations, as a correlation can’t be deemed a causal relationship. But there is a significant correlation between education level and life expectancy as well as financial wealth and life expectancy. Better educated people tend to live longer lives, but it’s important to bear in mind that this group does tend to have a higher income too.
You may not have considered this before, but often, people can take their individual socioeconomic and educational status to make a guess as to how long they will live. This information can, while not guaranteed, then be used by the individual to take their potential or estimated life expectancy and to factor it into their decision-making processes.
Pensions can factor into this. Individuals who are unlikely to live long into retirement may rather save their money and use it during their younger years rather than saving it for a time that they may not even make it to. The pension system, consequently, tends to set incentives that change such individual’s behavior. Those who are more likely to benefit from the pension scheme tend to understand that they are likely to live longer and may make decisions such as taking extra time in education to boost their income and make higher pension payments to benefit more down the line.
By encouraging those who are unlikely to fully benefit from pensions to fully invest in pensions, we could deem the current pension system to be regressive, as opposed to progressive. It is creating social disparities, rather than bridging social gaps. It is leading to a redistribution of wealth from the bottom to the top and it is specifically wealthy and privileged within society who are ultimately receiving particularly high payouts due to their longer life spans.
The Politics of the Pension System
Many are now wondering how to best resolve this problem. Where there is disparity, things need to change. However, there is no clear mathematical answer to provide a solution.
One suggested method is the use of different mortality tables being put to use for different groups. Some have suggested that the system could adjust the pension contribution or the amount of the pensions accordingly so that each group benefits equally. However, whether this would actually prove effective in practice is something that we can’t currently answer. Counterarguments note that there are always trade-offs between redistribution (which is supposed to secure more equality) and incentive effects (which are supposed to influence people’s behavior).
Though there may not be a clear resolve right now, it is still important for policymakers to consider what they are doing. If they do not want to disadvantage any particular demographic, they will have to look at all areas of the social system at the same time when creating policies. It is important to consider things such as the health system and the education system when considering or making changes to the pension system. It is also important to consider the ways that the less fortunate do benefit from the pension system to ensure that these elements aren’t taken away either.