Guest Editorial
| Date | 01 March 2006 |
| Author | Ann-Charlotte Ståhlberg |
| Published date | 01 March 2006 |
| DOI | 10.1177/138826270600800101 |
| Subject Matter | Guest Editorial |
GUEST EDITORIAL
In many parts of the world, a restyling of pension systems is taking place. Because of
the growing financial pressure of aging populations, reforms have often resulted in
reduced pension levels. Since aging populations make pay-as-you-go systems
economically unstable, many countries have exchanged a defined benefit system for
a defined contribution one which is stable because no more can be taken out of the
system than has been put into it.
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This shift in pension design is placing increased demands on the individual to
understand how the pension system works, how financial markets operate, and how to
privately invest in supplementary pension savings. People need at least to know what
pension benefits they can expect and how the amount varies with their choice of
retirement age in order to decide how long they need to remain income-earners and
how much they need to save on their own. This in turn places demands on pension
authorities and administrators to inform and raise awareness among prospective
pensioners. Recent research also shows that the better-informed citizens are the more
likely they are to accept reforms.
Insufficient information or knowledge can lead to individuals making decisions
that may have negative consequences for their future pension benefits and realising
too late that, because they have too little savings, they must delay their retirement or
drastically reduce their consumption. One may well ask why people do not themselves
acquire the necessary information. There are a number of responses to this question.
Pensions are a complex area and it is both difficult and time-consuming to explore
how the system works and what it means in terms of one’s own pension. ‘Turning a
blind eye’ can be rational behaviour if the costs of making an inventory appear greater
than the rewards. Another explanation, when retirement seems far ahead, is the lack of
any feeling of urgency. Gaining information can also incur psychological costs since
it may be uncomfortable and disturbing to be reminded that one is getting old. It may
also be the case that we retain trust in the state to provide us with adequate pensions
and therefore do not think that we need to worry.
The difficulty of estimating the size of a future pension varies with the different
pension systems. The calculation is often simpler in a defined benefit than in a defined
contribution system. In a defined benefit system, the pension is set in advance at a
certain level, e.g. a certain percentage of final income, and the normal age of retireme nt
European Journal of Social Security, Volume 8 (2006), No. 1 3
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The system may be politically unstable, however. If pensions become too low it is not certain that
voters and politicians will be able to stand by the construction.
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