Pensions Crisis

The pensions crisis is a predicted difficulty in paying for corporate, state, and federal pensions in the U.S. and Europe, due to a difference between pension obligations and the resources set aside to fund them. Shifting demographics are causing a lower ratio of workers per retiree; contributing factors include retirees living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers, especially relative to the Post-WW2 Baby Boom). There is significant debate regarding the magnitude and importance of the problem, as well as the solutions.

For example, as of 2008 U.S. states had underfunded their pension programs by an estimated $1 trillion. The present value of unfunded obligations under Social Security as of August 2010 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the program's shortfall between tax revenues and payouts over the next 75 years.

Reform ideas are in three primary categories: a) Addressing the worker-retiree ratio, via raising the retirement age, employment policy and immigration policy; b) Reducing obligations via shifting from defined benefit to defined contribution pension types and reducing future payment amounts (by, for example, adjusting the formula that determines the level of benefits); and c) Increasing resources to fund pensions via increasing contribution rates and raising taxes.

Read more about Pensions Crisis:  Background, Pension Computations, Solutions, Key Terms, See Also

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