Understanding Pensions

Understanding Pensions

Understanding Pensions

Understanding Pensions

Synopsis

The area of pensions is one that is constantly in the news these days. This timely new book is an extremely useful contribution to this important issue and will be of use to policy-makers as much as to students and academics of finance and public policy.

Excerpt

Benjamin Franklin once famously remarked that there were two certainties in life, death and taxes. When Franklin made this observation, in the eighteenth century, most people died young. We should not be surprised, then, that he did not include living to a ripe old age in his list of life's certainties. Living to a great age is not a certainty today. For growing numbers of people, though, it is a distinct possibility. Children born in the year 2000 in France, Germany, the UK and the USA can, on average, expect to live for more than 77 years. Their Japanese counterparts have an average life expectancy of over 80 years. In Britain, the number of congratulatory messages the Queen sends each year to new centenarians has quadrupled since she was crowned in 1953. What is more, life expectancy is projected to go on rising in the coming decades.

Unlike longevity, the length of time people typically spend in paid employment has not been increasing. In fact, the opposite has happened. Since the 1970s, the average age at which people in Britain and many other developed countries cease working for a living has been falling steadily. In other words, there has been a significant increase in the proportion of peoples' lives spent in retirement. This has raised pensions to a level of importance never seen before. In the past, pensions were a means by which people insured against the unlikely event that they would become too old to support themselves by working. Today, pensions act more like retirement endowments, because most people can expect to stop working long before they die.

Pensions have long been the subject of fierce controversy. Although few would argue against the need for pensions, a debate has raged for more than a century over the most appropriate way to provide them. This is because pensions can be provided through a variety of mechanisms which differ in their advantages and disadvantages. The debate is not just about the pros and cons of one approach to pension provision compared with another, but about whether, and how, different approaches can be combined to produce an optimal retirement income system. Although the intensity of the debate has ebbed and flowed over time, it has never been stronger than it is at present. . .

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