Pensions Crisis - Solutions

Solutions

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; and c) Increasing resources to fund pensions via increasing contribution rates and raising taxes. Recently the latter has included proposals for and actual confiscation of private pension plans and merging them into government run plans.

Proposed solutions to the pensions crisis include ones that address the dependency ratio – later retirement, part-time work by the aged, encouraging higher birth rates, or immigration of working aged persons – and ones that take the dependency ratio as given and address the finances – higher taxes, reductions in benefits, or the encouragement or reform of private saving.

In the U.S., since 1979 there has been a significant shift away from defined benefit plans with a corresponding increase in defined contribution plans, like the 401k. In 1979, 62% of private sector employees with pension plans of some type were covered by defined benefit plans, with about 17% covered by defined contribution plans. By 2009, these had reversed to approximately 7% and 68%, respectively. As of 2011, governments were beginning to follow the private sector in this regard.

Research indicates that employees save more if they are automatically enrolled in savings plans (i.e., enrolled and given an option to drop out, as opposed to being required to take action to opt into the plan). Some countries have laws that require employers to opt employees into defined contribution plans.