If you have been listening to the news about pensions over the past few years, you will have noticed something: the current pension system is not sustainable. And at the same time, they add that there is an urgent need to reform the pension system because the current pension system is unsustainable in the long run. But what is at stake is often no longer explained.
The main one is how they are actually designed. That is, current pensions are funded from money paid into the Social Security system by current workers. The social insurance paid by current pensioners during their working years is used to fund the pensions of the elderly at the time.
Indeed, at its inception, this seemed like a relatively simple solution. No reserves were needed, and the money collected was essentially consumed immediately. Also helping the situation was the fact that it was a time when the labor force was very large, i.e., many children were being born. In other words, for every one pensioner, there were four workers. However, this was not sustainable in the long run.
The birth rate, which rose rapidly after World War II, has gradually declined and continues to decline. On top of that, life expectancy is increasing. Whereas previously one could receive a pension for an average of 20 years, it is now 40 years. Thus, one worker receives the equivalent of four pensions from social insurance, and for twice as long. The state must therefore contribute more money from its budget to pay the pensions.
Unfortunately, the needed reform of the pension system is not being seen. This is because it is indeed an unpopular move, and unpopular precisely among the country\’s powerful voting bloc, the pensioners. Also, no government would allow it, as it would mean losing the possibility of re-election. So it will be interesting to see how long this system lasts.