Whether Governments in Developed Countries Should Continue to Make Major Contribution to Citizen's Pension

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QUESTION: Governments in developed countries should continue to make a major contribution to the pensions of their citizens. How far do you agree with this statement?

Contents

1. Introduction ........................................................................................ 2

2. Where do pensions come from? ................................................... 2

3. Four main problems faced by government ................................. 3

4. Reasons for ‘cuts’ and no ‘cuts’ .................................................... 4 4.1 Life expectancy and dependency ratio ........................................ 4 4.2 Recoveries from financial crisis ................................................... 4 4.3 Government’s obligation.............................................................. 5

5. Recommendations with evaluations ............................................ 5 5.1 Saving more now ........................................................................ 6 5.2 Increasing retirement age............................................................ 6 5.3 Shifting from DB to DC ................................................................ 7

6. Conclusion ......................................................................................... 7

7. Bibliography ....................................................................................... 8

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1. Introduction

With the increasing average life expectancies in developed countries, pensions — which afford people a decent standard of living by offering access to an adequate amount of monthly money during retirement — have become one of the biggest social concerns in recent decades. It has been a common belief that government should have the ability to offer the bulk of pensions in order to maintain a good health of its aging citizens and thus a society with stability, which is seen as a symbol of prosperous nations. However, confronted with increasing financial difficulties, governments in most developed countries have tended to cut state pensions. Although state pensions play a pivotal role in the pension system as a whole, it seems that state pension cuts would probably be the most realistic and practical way to address these problems. This essay will briefly outline the sources of pensions in developed countries, and will analyse several related problems. It will then put forward reasons for cutting state pensions, and will also include different voices. Finally, some possible solutions with evaluations will be suggested.

2. Where do pensions come from?

The pension system varies from country to country. However, in most developed countries, about 60% of annuities (according to the OECD) comes from the government (The Economist, 2011a), while the rest comes from employers and personal savings. For state pensions, excepting the basic state pension for individuals with no income, there is usually a pay-as-you-go (PAYG) system (tax-free benefits) to which both employees and employers contribute (ibid). Some countries, like America, Britain and the Netherlands, include schemes offered both in public and private sectors; others, like many 2

European countries, offer unfunded ones. Moreover, personal investments or saving accounts that people can draw from when they retire are additional options. However, due to a series of problems, these distribution percentages of pension providers may be tipped as governments ponder potential reforms.

3. Four main problems faced by government

Although the government has been playing a pivotal role in the pension system for a long time, problems emerges gradually with the social development in recent decades. According to The Economist, there are four main original problems associated with the current state of the pension system (ibid.). Firstly, as the standard of living in developed countries improves year by year, the average life expectancy is growing rapidly. Thus the length...
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