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FIAP > Boletín – Recientes > Pension Note No. 31 – Demographic reality forces European countries to introduce individually funded pension systems – November 2018

Pension Note No. 31 – Demographic reality forces European countries to introduce individually funded pension systems – November 2018

10 December, 2018
  • The PAYGO pension systems are based on a population pyramid that no longer exists, due to the increase in life expectancy and the drop in birth rates. Thus, it is impossible to maintain a mechanism based on ever fewer active workers financing the benefits of ever more pensioners.

 

  • What have countries done to address their unviable and derelict PAYGO systems? First of all, they have had to address the underfunding of pensions with public resources, due to which the pension debt has become unsustainable. But since fiscal contributions were insufficient for financing pensions, they were forced to carry out parametric reforms. European countries have also been introducing private individually funded systems. Given the delicate situation of the public PAYGO systems, one can safely assume that they will become more relevant by the day.

 

  • Thus the chickens have come home to roost: the countries with PAYGO pension systems that have not introduced reforms or robust individually funded systems will have to live with a very substantial reduction of pensions in the future, due to the parametric adjustments they will have to make to avoid the bankruptcy of the public systems. That is why the individually funded systems will become ever more relevant in the countries that are still running PAYGO systems.

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