PENSIONS: Why is there a Pensions Crisis?

Why is there a Pensions Crisis in the UK?

What is a pension’s crisis? Put simply, it is that there aren’t enough funds to finance all the pensions that there will be in the future. This is particularly true with private sector funds.

At the minute it is estimated that there is a ratio of 3 workers to every pensioner, by the year 2050 however this is estimated to have fallen to 2 workers for every pensioner. Due to an ageing population which is changing the demographic, the dependency ratio is likely to carry on this trend.

There are several reasons as to why there is a pension’s crisis…

First and foremost we have an ageing population in the UK. An ageing population has come about due to increased health/healthcare and a baby boom during the post war period. Thanks to the baby boom there is a bulge in population of the middle aged – over the coming years they will retire and leave their younger generations to pay for their pensions. However, thanks to improvements in contraceptives there are fewer younger people in comparison to their elders. This is causing problems for government finances as to how they will fund state pensions.

Another cause of this crisis is early retirement. The current retirement age in the UK is 65 and so governments allocate an amount to state pensions on the basis that everyone will retire at that age. However, if someone was to retire at say 55, then they would be taking more of a state pension than those who retired later. This is draining pension funds. 

Another possible contributing factor is that employers and their employees may not be contributing enough to funds which means that pensioners get less of a pension than they would if both contributed more.

Finally, current state pensions are funded on a ‘pay as you go’ basis meaning that current pensions are paid for by the taxes of current workers. This is causing an increased tax burden as workers have to raise finance and increase the costs of pensions. Because the ‘pay as you go’ system only works if each successive generation is of approximately the same size, it is the population bulge that is causing this crisis.

If you fancy learning more about economics and the financial world around you check out my other articles on my blog: http://insighteconomics.blogspot.co.uk/

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