Demography Rules in Pension Systems

Abstract

Traditional pension systems were established under assumptions similar to the trick behind the Ponzi scheme: each next generation of participants is much larger than the previous one. That created a surplus at the disposal of politicians, who were able to finance social expenditure out of that demographic dividend. Phase 4 of the demographic transition stopped that possibility. It is extremely difficult to reduce inflated expectations after the dividend has gone. This applies not only to pension systems but also to public finance in general.

The chapter briefly discusses that situation and also addresses common myths in the discussion on pension reforms. Demography rules and real pension reform is just adjusting institutions to the changing reality, which is one of the greatest challenges developed economies face nowadays.