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Data show that population in developed countries will start declining by end of this century. Because this is due to low birth rates and aging this will lead to very large imbalance between economically active people and retired people who are dependent on contributions of the people who work.

Is there any way government pension systems can be reformed to in a way they are proofed against changes in the ratio of economically active and dependent people?

Ezekiel
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    The data linked to doesn't at all 'show' that, however likely some people's projections based on that data appear to be. Can you edit the Question to reflect the difference between stated fact and speculation? – Robbie Goodwin Oct 24 '23 at 21:48
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    @Peter-ReinstateMonica A smaller population might benefit from a greater share, but in this case the smaller population is the youth and the greater increasing population is the older generation. Also, it is inevitable that "the cake" will be smaller for declining population, all else being equal. Less teachers, less house house building etc etc. – KDP Oct 25 '23 at 04:38
  • "data" tends to have a very wide back... – njzk2 Oct 25 '23 at 17:57

4 Answers4

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There is no magic trick that the government can use to solve this issue. Government pensions can be kept funded by:

  • Increasing taxes
  • Reducing benefits
  • Raising the retirement age
  • Increasing population with immigration
  • Make capital more substitutable for missing labor (robots)
  • Making capital and labor more productive through technology

The government will have to implement some combination of the above measures, but government can only really directly affect the first 3-4. Private pensions are also not necessarily a solution to the problem. Low population growth will likely lead to low economic growth, affecting the saving and investment model as well. People will either have to save more, receive lower benefits, or retire later. There aren't any other options. Also a smaller population will reduce value of the assets which people use to save (since there will be less demand for them).

You should read Barr's textbook The Economics of Welfare State. He explains this in chapter 9.

Journeyman Geek
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Leeh Mizrahi
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    But smaller populations also share the same "wealth of a nation" between fewer people, resulting of a larger piece of the cake for each remaining person. – Peter - Reinstate Monica Oct 22 '23 at 22:25
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    @Peter-ReinstateMonica no, first it does not make that much sense to talk about wealth, but I guess you mean income when you say "wealth". If we would not produce anything the society's wealth would be drained in matter of few years. Society's income is what society can produce and what society can produce depends on number of people. Moreover, modern research into economic growth like some variants of endogenous growth models show that speed of progress depends on total number of people. More people = faster progress because more people can work on R&D where totals matter not share of – Leeh Mizrahi Oct 22 '23 at 23:25
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    population. Also, less people means less specialization which again results in less output. No matter how you look at it how rich society is also depends on how many people it has. This is why dense populated cities are richer than villages, and why the richest cities have higher population density than poorer cities. So drop in population inevitably means drop in peoples incomes, unless it is offset by new technologies or robots (this is why the last 2 points are above in my answer) – Leeh Mizrahi Oct 22 '23 at 23:27
  • @Peter-ReinstateMonica it's funny that you said cake instead of pie as if by changing the desert let's you avoid the fixed pie fallacy. – Frank Shmrank Oct 23 '23 at 05:43
  • @FrankShmrank Not a native speaker here. Also, I'm not (consciously ;-) ) aware of that fallacy; I was inspired by the British slogan from the 70s or 80s "We don't want a single cake -- we just want the whole f*cking bakery!" (And to my foreign ears it sounds much more authentic and demanding if you pronounce the store like a shop for bicycles.) – Peter - Reinstate Monica Oct 23 '23 at 07:55
  • @ LeehMizrahi: for income, as you say, the “share of the pie” argument is a fallacy. But for wealth, as @Peter-ReinstateMonica first said, it’s not; in pre-industrial economies, it was a very significant effect — see for instance Max Roser’s Breaking out of the Malthusian trap at Our World In Data, especially its chart The English economy in the ‘Malthusian trap’. Today it’s a small effect compared to the countervailing income-related effects you mention, but it’s far from a complete fallacy. – Peter LeFanu Lumsdaine Oct 23 '23 at 10:29
  • @PeterLeFanuLumsdaine What is indisputable is that natural resources would last longer, ceteris paribus. But I admit that I was thinking in more general terms: An effect like a share buyback where fewer people now own the same stuff, including factories, real estate (everybody now gets their own house) etc. But the economic throughput is probably more important: The share in stock is a one-time effect. Therefore, yes, a rise in productivity and more automation is needed to keep everything running. – Peter - Reinstate Monica Oct 23 '23 at 10:48
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    Saving more can't solve the entire problem either. Imagine an entire country where everybody lives off their savings — that can't possibly work. – gerrit Oct 23 '23 at 11:43
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    You should add a 7th option: encouraging euthanasia. Canada has drastically expanded it's euthanasia program, in ways that target the poor and ill: https://www.spectator.co.uk/article/why-is-canada-euthanising-the-poor/ and is expanding it to drug addicts: https://www.vice.com/en/article/4a3bdm/canada-will-legalize-medically-assisted-dying-for-people-addicted-to-drugs Encouraging those that are too old to kill themselves is a logical progression. It's couched as compassion, but makes hard economic sense given the age structure. More countries will follow suit. – Eugene Oct 23 '23 at 15:34
  • Another option is to incentivize people to have children. – Erel Segal-Halevi Oct 25 '23 at 07:09
  • adding more people does not help if those people do not earn enough to cover the costs of the pensions. In fact, it makes things worse as they will require pensions themselves in time. A downward spiral economy based on virtual slavery is the eventual outcome. Productivity is the only answer - though I have a feeling inflation is the solution governments are aiming for, ie productivity flatlines so you reduce the dependant cost of the pensions. Of course they should incentivise older people (who live much longer and healthier) to work casual or part time. – gbjbaanb Oct 25 '23 at 15:58
  • of course, is it really that muh of a problem, as pensioners with lots of money spend it in the economy, thus boosting productivity. I can't think why government models always seem to forget this but still treat similar aspects (such as the public sector who often appear to spend just as much time inactive as pensioners) as fine because they spend their private-sector tax wages in the economy. – gbjbaanb Oct 25 '23 at 16:04
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Is there any way government pension systems can be reformed to in a way they are proofed against changes in the ratio of economically active and dependent people?

I think a very basic exmination from first principles of the problem of any pension system can answer that.

When someone receives a pension, that means they receive labour but don't provide labour. No matter what you do and how you finance the pension, this can't be changed. You can not "save up" labour and get it back later. You can try to take measures to reduce the labour the retired people will need, but this is no substitute for a pension system that can cope with different ratios of working people versus retired people living of others work. Ways to reduce the amount of labour needed:

  • Improve economic productivity. Yes, well... we are trying to do that already. It's sure to help, but either it will keep up with demographic changes, or more likely it won't and there is nothing we can do about that considering it's already a prime imperative of any capitalistic economic actor to try to be as productive as possible.
  • Save up things that save labour later, be it finished goods retired people might need or things that take labour to make and the retired people could exchange for things they need. But that's just here to name all the possibilities that come to mind, hoarding things is bad for the economy and is just plain impractical.
  • Saving up money won't change anything about the equation of how much work needs to be done versus how much work can be done by the working people.

So when the ratio of working to retired people changes, the working people will need to provide for more non-working people with their work if you want to keep everything else equal. You could of course try to keep the fraction of all labour that is done for retired people constant, but most of the possible measures are either not practical at scale or not desirable:

  • Get more working people:
    • Immigration (problems at scale, plus ideological opposition by some groups).
    • Incentivising having children (easier said than done).
  • Raising retirement age
  • Reduce the standard of living post-retirement

To get the working people to provide for the retired people, there are basically two systems:

  • Pension from investments (where some people like to forget that the working people are still providing for the retired people)
  • Distributing tax money to retired people (where it's obvious that the working people are providing for the retired people)

Both systems can easily be adjusted for different demographic compositions or anticipated changes as follows:

Pension from investments: People "save" for retirement individually. From the point of view of the whole population, this means that retired people hold a significant fraction of the total capital in your economy and capital ownership is skewed towards older people in general. In a sense this can be proofed against demographic changes by choosing (or legally mandating) which fraction of working people's income needs to go towards buying pension investments based on anticipated demographic (and other economic) changes. It's not possible to guarantee a specific level of comfort/income with this system, because you need to set the amount you pay in during your working life and once you are retired, either you have enough or you don't. If a lot of people didn't pay in enough in this system, the difference will be made up by the distributing tax money as in the other system (with the difference that people will be happier to receive a pension than welfare handouts).

Distributing tax money: Here it's clear that nothing is really saved up, but that the pensions are provided by working people (as in the first system too). Tax income (of working people) is distributed to people who are entitled to a pension. There are different ways to determine how much payouts a retiree is entitled to. Most people would agree the payout should depend on how much someone worked/paid in tax. Most people would probably agree there should be a minimum payout, because otherwise the state will have to provide welfare payments anyway. Based on those two assumptions it's easy to work out a system independent of the ratio of working to non-working population. You will have a function of lifetime tax paid to pension amount. The function could be such that someone who paid twice the tax also gets twice the pension. At the lower end, you will have to cushion the function so poor people can still survive. If you want, you can also do something about the high end, for example reducing the growth of the pension to below-linear with respect to tax payments. Some existing pension systems even have a hard cap at the high end. And then you just determine each year the amount of tax you need to collect and change the rates accordingly. You could also add a feature that someone could pay in more voluntarily in exchange for higher pensions which would make it a little more difficult to set the mandatory rates correctly, but still easy enough.

Either way, working people still do the work for the non-working people.

Nobody
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  • "You can not "save up" labour and get it back later". Actually you can, to a considerable extent, provided the labour is used to add in appropriate ways to the stock of productive capital. – Adam Bailey Oct 23 '23 at 13:22
  • @AdamBailey Someone will need to grow food, maintain housing and produce medicine for instance. Someone who is retired, by definition, will not be doing that work. You can add whatever societal constructs you want on top of that, young people will still be doing the work for the retired people. To me it sounds like you are a proponent of the first of the two versions of such a societal construct that I describe in my answer. – Nobody Oct 23 '23 at 13:51
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    @Nobody Labor spent in the past creating things like internal combustion engines, combine harvesters, etc., massively reduced the amount of labor needed today in order to feed the same number of people. (Not only did it "store" that labor, but we've gotten back a shockingly good rate of return, we've saved way more labor than what was stored.) – user3067860 Oct 23 '23 at 14:45
  • @user3067860 That's great. It's still an abstract concept and when you are 90 years old and really need someone to help you wipe your butt they will hardly accept this concept as payment. – Nobody Oct 23 '23 at 14:53
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    @Nobody We have a bidet, actually. – user3067860 Oct 23 '23 at 15:07
  • @user3067860 Very good answer, but sadly we haven't automatized everything yet. There might even be some things where automation isn't desirable (i.e. not desired by the people being cared for) especially in the care for old people. – Nobody Oct 23 '23 at 16:03
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    OK, yes, if your population is declining to 0 then the last few people standing are --ed without some very future technology. But that's more a question for Worldbuilding than Politics. If we limit the question to realistic, non-apocalyptic rates of demographic change, then reducing the necessary workforce is part of a viable strategy. (Probably not sufficient by itself but can certainly reduce the need for non-prefered methods.) – user3067860 Oct 23 '23 at 18:08
  • @user3067860 I absolutely agree with your last point, but I would not call automation/increased productivity "saving up labour". And for the forseeable future productivity increases can certainly help reduce this problem, but cannot outright solve it and I think it would be naive to just hope that productivity increases happen fast enough to counter population loss, so you still need a pension system that can be adjusted for demographic changes independent of other economic factors – Nobody Oct 23 '23 at 21:21
  • interesting that when looking at the tax distribution part, you mostly mention taxing income. there are lots of other things that can be taxed, like capital gain, capital itself, company profits, sales, ... – njzk2 Oct 25 '23 at 18:02
  • @njzk2 True. Not intentional. Should probably elaborate on that. – Nobody Oct 25 '23 at 21:49
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The crux here is "government pension systems". As soon as politicians discover pension schemes as a fund to plunder, the long-term viability is meaningless.

Thus, any reform has to get the government out. Pensions have to be funded and have to be secure. This is not a theoretical idea. The Dutch pension scheme is often considered to be the best in the world, and it mostly is funded. Even the government workers pensions are funded (via the ABP fund), although this didn't stop the government from plundering these savings when the ABP was founded. (AOW, the unfunded part of Dutch pensions, can be funded from regular taxes on future pensions. Dutch pension funds are tax-deferred)

Note that this is not a plague that's unique to government pension funds. Companies have been equally at fault. Therefore, as part of the reforms, oversight of the pension funds must be put in the hands of the beneficiaries: retirees and employees. And to protect against the shift in ratios, the oversight must be set up in a way that retirees cannot plunder the pension funds in the short term either.

Ultimately, of course, the only scheme where nobody can plunder your pension directly is an individual scheme where no assets are shared. And even that does not protect against governments which create unsustainable debts. So a necessary second part of the reforms has to be a hard cap on government debt. In theory, both the US and the Eurozone have debt caps, but in neither case does that cap work in practice. The US keeps increasing the cap with worrying frequency. The EU has conveniently forgotten to implement any sort of cap enforcement, and via interest rate subsidies shift over a trillion Euro to the biggest violators.

MSalters
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  • I don't understand the part about government debt. How does government debt threaten a private pension fund? – gerrit Oct 23 '23 at 11:53
  • @gerrit: In an ageing, shrinking population (the premise of the question), the cost of government debt has to be paid from taxes on pensions. It's nice to get $100.000 from your pension, but if the tax rate on that pension is 90% then you're still going to be quite poor. To prevent this effect, the government debt has to shrink as the population shrinks. This is of course easier said than done in populist democracies. – MSalters Oct 23 '23 at 12:04
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    The cost of government debt has to be (partly) paid from all taxes. It doesn't matter whether those are income tax from pensions, income tax from labour, corporate taxes, or non-tax government income. Also, pension funds own a large part of the government debt, so without government debt, those pension funds would have to diverge in riskier investments. – gerrit Oct 23 '23 at 12:58
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Yes but it's not a pension system.

This is kind of a duplicate answer from politics.stackexchange: do-any-countries-have-a-pensions-system-funded-entirely-by-past-contributions.

Malaysia, Singapore and India basically have what amounts to a mandatory 401k system. It is illegal for companies to hire salaried employees without paying into this 401k system (for employees there is no legal requirement since their salaries are deducted by their employers automatically). In Malaysia it is called the Employees Provident Fund (EPF), In Singapore it is the Central Provident Fund (CPF) and in India it's called the Employees Provident Fund Organisation (EPFO). The system was started by the British during colonial rule and have continued to this day.

Your retirement fund has no relationship with the population. It is purely based on your lifetime contributions into the fund (the monthly deduction to your salary) and your company's match (legally mandated, at least in Malaysia). In addition the fund is also managed by the government and you get dividends from government investments (exactly like a 401k only managed by the government).

This is not a pension fund however. How much money you have at retirement is the sum total of all contributions and dividends throughout your employment. This is basically a savings/investment fund. People who are lucky enough to have jobs that pay really well get more money for retirement. People who are not so lucky won't have much for retirement.

Economic shocks will affect your retirement fund since both your salary (and employment status) as well as profits from investments are affected by the state of the economy. For example the dot-com bubble, the 2008 real-estate bubble and COVID have all affected my personal retirement savings.

The upside to this system is that this cost the government nothing to implement. At least in Malaysia, it is self-sustaining with profits made from investments using the fund. EPF employs thousands of people from tellers manning service counters to accountants to investment managers to law enforcers (they go after companies that fail to contribute - the seriousness of this is second only to failing to pay taxes).

slebetman
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  • if that's not a pension system, that doesn't really answer the question, then? – njzk2 Oct 25 '23 at 18:03
  • @njzk2 It answers the qustion title since there's no mention of pensions. It doesn't answer the last paragraph of the question directly. In any case, stackexchange allows for answers to A/B questions when you're asking for A when the actual issue is B it is acceptable to answer for B. In any case I'll leave it to OP if this is what he is looking for – slebetman Oct 26 '23 at 02:36