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Tuesday, December 09, 2025
A triumph of capitalism
If you are reading or watching international macroeconomic content, you probably encountered stories like this: Country X is worrying about a looming pension crisis, while looking jealously at the pension system of country Y, which seems to hold up much better. Usually that contains some sort of calculation of how many workers are paying for one pensioner. Which points at the actual problem: The countries having underfunded pension systems all have pay as you go systems, in which today's workers are paying for today's pensioners. Those systems don't do well with falling birthrates and stagnating or falling population numbers. The countries that are always pointed out as working better are those who have individual savings systems to finance pensions: Today's pensioners put money aside (usually not voluntarily) when they were working, and now fund their own retirement.
Once you think of it, this also reveals an interesting fact: The pension crisis isn't the fault of today's pensioners. In fact, if all the money today's pensioners have paid in during their work life had been saved up in their name, their pensions would be a lot safer. It is a triumph of capitalism, where an individual saving system combined with compound interest over decades yields much better results as the "intergenerational solidarity" pay as you go systems.
The obvious problem is that it is hard to impossible to change from a pay as you go system to an individual savings system, as the currently working generation would have to pay both the pensions of the previous generation and their own. Many pension systems all over the world produced surpluses when the baby boomer generation was paying in, there being so many workers per pensioner. But politicians took those previous surpluses and spent it on other stuff, so the money is gone and can't be used to fix the system for the future. Not having locked the money in individual savings accounts also missed out on the compound interest that would have accrued.
In short, the pension crises all over the world are real, but they are self-inflicted. A sequence of larger and smaller generations doesn't cause a pension crisis if every generation pays their own pension.
- posted by Tobold @ 9:42 AM Permanent Link
